giofranchi

Well, of course you might be right! I know much more people who are in the inflation camp, than people who are in the deflation camp. And, as far as the differences between America and Japan are concerned, you surely are right! But what about the 1930s? They clearly were different times… But probably in the 1930s they were looking back at the 1870s and they were assuring themselves: “Well, those were different times!”. I like to study history (in particular the history of the financial markets), and usually I don’t like to come to a conclusion which is not proved by history. Anyway, FFH’s CPI-linked derivatives are just a protection: small downside, if inflation is going to be the bigger problem, great upside, if the vice versa is going to happen. Right? giofranchi

For anyone who might be interested. giofranchi mwo091012.pdf

Giofranco, Agree with you re FFH, BRK, L How are you holding gold? Physical gold? ETF's? FWIW, my capital allocation 40% cash (probably more than I like- I am a chicken-my plan is to continue to dollar cost average into ideas) 60% equity (UNH, ALS, FFH, BRK, BAC/AIG, LUK, small amounts of SHLD,L, PEY, SU, RNK, BMO, HCG) biaggio, actually, my portfolio is as follows: 25% FFH, pretty much unloved by the market right now! 43% long equities: owner-operated companies that are selling at or below book value (I also own LUK), the companies less loved by the market right now! 24% short equities: a bunch of small and medium cap, over-leveraged and cyclical stocks, the companies most loved by the market right now! So… it is really a suffering!! :( 8% Gold: Xetra-Gold, because: “Xetra-Gold is a no par value note denominated in gold issued by Deutsche Börse Commodities GmbH. Xetra-Gold is an exchange-traded security in the form of a bearer note that grants the investor the delivery of gold. Every single bearer note grants the investor the right to demand the delivery of one gram of gold from the issuer. The issuer holds a corresponding amount of physical gold and a limited amount of account gold with a precious metals company. The fact that Xetra-Gold takes the form of a security makes it fungible and as easy to transfer as a share.” I look at Xetra-Gold as the easiest way to own physical gold. I might be wrong, but imho gold nowadays is the safest of currencies: I just prefer to own gold, instead of cash denominated in Euro. Some days ago an interview with Mr. Ray Dalio was posted, and someone commented: have you ever heard Mr. Dalio suggesting something “actionable”? Well, in fact it is very rare indeed… but at least his suggestion to own 10% of gold is definitely actionable! Isn’t it? giofranchi

For anyone who might be interested. giofranchi Daily+9.17.12.pdf

25% FFH 43% long equities 24% short equities 8% Gold giofranchi

twacowfca, I am intrigued by your description of LRE's very skilled operations. Maybe, this is not the right place, but please would you explain a little more in depth what you mean by “conservative investing and intelligent capital management”? Could you also share with us why you think that LRE is good value right now? Thank you! giofranchi

rimm_never_sleeps, I could not agree with you more! giofranchi

berkshiremystery, my firm’s portfolio is very concentrated, as concentrated as yours!, but I would never put all eggs in just one basket… anyway, if I did, that basket right now would be FFH! ;) What I really like about Mr. Rodriguez is the great emphasis he puts on history. An investment thesis should be tested and proved by history, otherwise it is just speculation. Mr. Rodriguez has said many times that, at the beginning of his career, he had the chance to ask Mr. Munger three things that would help him to develop his skills as a money manager, and Mr. Munger replied: “Study history, study history, study history.” That’s why my favourite lines from his latest commentary are the following: The Fed Chairman recently expressed the opinion that he does not view unemployment as structural. However, he is using this “All In” approach to shock the economic system. This reflects something other than normal times. He believes if the Fed gets interest rates low enough for a sufficiently long period, the recovery will finally gain traction. This is pure speculation. I view this approach as highly dangerous, misdirected and untested. giofranchi

My advice would be to concentrate much more on the quality of management. If you can identify high quality management, usually the quality of written premiums follows suit. giofranchi

The latest from Mr. Robert Rodriguez, for anyone who might be interested. giofranchi all-in-commentary-9-2012.pdf

I know that most of you don't like investing in funds. But the Brooklyn Investor is very good, and I would read his latest idea. giofranchi Special_Opportunities_Fund_SPE.pdf

Mr. Alan Abelson's point of view on QE3, for anyone who might be interested. giofranchi Two_Cheers_for_QE3.pdf

Mr. David Rosenberg's point of view on QE3, for anyone who might be interested. giofranchi David_Rosenberg_BernanQE_Plays_With_A_New_Deck.pdf

Gavekal's point of view on QE3, for anyone who might be interested. "Ultimately, we believe QE3 will be counterproductive. The chances of higher investment have fallen and the likelihood of wholesale capital misallocation resulting in a future financial crisis has increased. What the US economy needs (and the global one for that matter) is the confidence provided by a predictable future – not more cheap money." giofranchi Daily+9.14.12.pdf

Well, as always I think that “culture” and “history” are very important. I have quoted Mr. Munger many times before, and I will do it again: "I don’t think General Motor should have wiped out the shareholders. That was a huge failure of management. If you think about it, Berkshire is a collection of failed businesses, that are gone. And here it is, this wonderful thriving place! As our businesses failed, our shareholders did not fail. We adapted. We took the money out of the failing businesses and bought other businesses. General Motors did not pass that test. They destroyed their shareholders…" Imho, that “culture” is what makes the safest of businesses, and L has showed to possess it, and to apply it on a value basis, for 50 years. Moreover, it has always been an owner-operated company, and that reinforces its very low risk profile. As far as “history” is concerned, if you include the dividends, the S&P500 has returned circa 9% annualised for the past 50 years. Far less than L has achieved. Not only L is ahead of the market on a 50 years basis, but it is ahead also on a 25, 10, and 5 years basis. That “culture” and that “history” tell me there is a very low probability L shall not continue to be profitable in the future. And, as long as a company doesn’t lose money, and as long as a company is selling below book value, I don’t really care about future earnings or future growth. At June 30, 2012, L’s book value per share was $49,31, while yesterday the share price closed at $42,69: that’s a 13,4% discount to book value per share. For a company with a wonderful “culture”, that returned 14% annualised for 50 years… it really looks like a no-brainer to me! I think L looks cheap also on an p/e basis: L: p/e = 13,1b / 1,17b = 11,2; 14% annualised return for 50 years, S&P500: p/e = 16,55; 9% annualised return for 50 years. That’s not to say that L is the best bargain out there! Far from me! AIG and BAC are even better. But, if you like L’s “culture”, and if you like L’s “history”, and if they speak loud to you about L’s future, well, then I guess L today is really good value! Two more things: 1) CNA is clearly not a very well run insurance company. Anyway, it is showing some improvements. Even though slowly, it is getting better. And, if it gets on track with its peers, the potential for higher earnings is very substantial. 2) Jonathan, Andrew, and James Tisch are in their late 60s, and they could go on compounding L’s capital at least for the next 10 years. They also have a family culture that I like, because it raises the probabilities that someone worthy will succeed them. They have already accomplished it in the past with great success: L is a second generation family company. Finally, Yes, my firm owns L. giofranchi

L has published a new Company Overview. For anyone who might be interested: http://ir.loews.com/phoenix.zhtml?c=102789&p=irol-index giofranchi

I haven't followed FFH's numbers closely for a while, but I think that you have to look at all those versus the equity number. If you have around 8B of equity for 24B of total assets, this means that a relatively small shock to the total assets could wipe out a large fraction of the equity, and they need to maintain a certain equity ratio for their insurance obligations. Someone else please correct me if I'm wrong. It is clear that even relatively small movements in the value of FFH’s portfolio could have a big negative effect on its equity, but that would imply Mr. Watsa is actually worried about investments results, right? So, all the hedges he put in place are part of his investment strategy. You could argue that a leveraged portfolio is riskier than an unleveraged one, and that’s why hedges are warranted. But, if you take away the $8 billion in cash, investments / equity is 200%, in line with most insurance and reinsurance companies. Take, for instance, Markel Corp., another holding of mine: it has total investments (less cash & equivalents) of $7,9 billion and equity of $3,6 billion. So, investments / equity is 220%, in line with FFH. It also has $2,2 billion invested in stocks. So, for MKL stocks / equity = 60%, while for FFH stocks / equity = 47%: FFH’s exposure to stocks seems lower than MKL’s. Nonetheless, MKL has no equity hedges in place. Please, correct me, if my reasoning is wrong. giofranchi

Yes! Very good indeed! Thank you racemize! giofranchi

Most probably Parsad is right! He surely knows much more than anyone on this board about FFH. Anyway, the numbers I see are: $24 billion of total investments, of which $10 billion are in bonds and $8 billion are in cash, while just $3,8 billion are in stocks. So, even if FFH is holding $18 billion in cash + bonds, is it possible that Mr. Watsa is hedging those $3,8 billion in stocks for contingent insurance losses? giofranchi

+1 giofranchi

I don't think you necessarily have to be defensive at that level. For example, someone who owns berkshire owns a company that should do well in a bad environment because they have a strong balance sheet and the ability to benefit from bargains. I don't plan on shorting stocks, but I like buying companies that are run in such a way that they can survive and thrive in difficult times (if not thrive immediately, at least come out stronger than their competitors because they acquired good assets in fire sales and such). Thank you very much Liberty! Yours are truly words of wisdom! And that's why my firm's largest investment by far is in FFH. And I really don’t plan to change that at all, even if today FFH is so much unloved… Actually, today I couldn’t agree more with Mr. Watsa's investment strategy. Today it seems that we are back to 2007: from 2002 to 2007 the stock market was propped up by a roaring housing market, and by a private sector debt which got bigger and bigger, we reached the point of “irrational exuberance”, and a rude awakening followed; then, from 2009 to 2012 the stock market was again propped up, this time by an ocean of liquidity, which succeeded in suppressing any yield on the so-called “safe-heavens”, forcing investors to look for yield somewhere else (the stock market), and almost reaching again the point of “irrational exuberance” (today the Russell2000 ttm p/e ratio is almost 30! Is it going to grow to the sky?!), while all the debt was just shifted from the private to the public sector, but practically didn’t get any better… Why should we be spared a new rude awakening? It seems that we didn’t learn anything… At least, so it seems to me! In a secular bear market for stocks, when “irrational exuberance” is in the air, I like what Mr. Watsa is doing: buy the best bargains you can find and sell short the Russell2000. I also like very much what you suggested and I want to point out that I consider your posts among the most well written and informative ones. giofranchi

On the other hand, a weaker USD and a higher gasoline price are both serious drags on consumer spending… Anyway, I understand your points and I agree. Monetary tools may certainly help. It remains to see if they alone are enough to solve our problems, or something more “structural” shall be required too. giofranchi

Well stahleyp, this is macro, so everyone can have different views and opinions. And I am not saying it could be useful for investing. They just happen to be ideas I completely agree with: 1) Throwing money at the problem will not solve the fundamental issues of insolvencies and weak balance sheets. 2) Whatever the ECB and the Federal Reserve do in the coming days won’t resolve any fundamental problems; they will just buy time and in the process make the eventual bust that much bigger. 3) …ultra easy monetary policy only buys time because the causes of the crisis are structural and fiscal. Ultra low interest rates discourage the necessary adjustments to be made at all levels, whether government, banking, corporate or households. In effect, zombie companies and governments are kept alive. And these policies encourage the financial sector to misallocate resources into speculative plays like commodities. 4) Central banks and markets are hoping that a new dose of liquidity will renew the animal spirits of companies and consumers but the reality is that we are in the midst of a depression, defined as years of rolling recessions interrupted by brief periods of recoveries. Depression will last until the process of deleveraging has run its course. That won’t be much before 2017. 5) Instead of the growth axis being centred on China it has the potential for being centred once again on the USA, providing Washington can produce sensible monetary and fiscal policies. 6) The foundation for this change rests on three developments: demographics, energy and technology. 7) America’s future will be defined by the results of the November elections as we keep saying. It is a fight between state-ism and free markets. Should Obama win a full blown run on the US dollar would be a likely result; and should Romney win America will be able to fulfil its potential growth by addressing the country’s debt and deficits and seeing that monetary policy will be on a more even keel. These are all points I strongly agree with: and that’s why I like Mr. Simon Hunt! Generally, I tend to believe that macro is not completely a waste of time… I know that many of you disagree with me! Anyway, this is my idea: I am fully aware that getting right every turn of the economy is impossible, but to get the “big picture” right, and act accordingly, is more common sense than macro forecasting. And might be helpful. And the “big picture”, imho, simply is: we are deleveraging and the best place to be in is America. This being said, my defensive stance did me a great disservice ytd! I am way behind most of you! But I believe investing is a marathon, not a rush… so, we will see! :) giofranchi

The latest from Mr. Simon Hunt, for anyone who might be interested. giofranchi Economic_Report_September_2012.pdf

Well, imho, you should go defensive years too soon! Remember Mr. Graham who said that anyone, who had not gone defensive by 1926, got killed. Later, from 1932 to 1937 the markets rose for 5 straight years. Then again, from 1938 to 1942 anyone, who had not gone defensive by 1935, got killed again… To go defensive, I mean buy what you like the most and sell short what you like the least. Instead of just buying what you like the most. I would never say don’t buy a true bargain, if you can find one. And Packer is right: true bargain can (almost) always be found. But in a declining market, even a true bargain can become cheaper and cheaper. giofranchi