giofranchi

moore_capital54, I have read your posts on gold and have found them extremely interesting and informative. I really have great respect for your work. Anyway, could you elaborate a little more on your view of the Euro? Even though the ECB is going to “start a massive monetization of the debt”, like Eric50 wrote, I remain very skeptical. Take, for instance, Italy: my country has been mired in public debt for as long as I remember (actually, for as long as my father remembers!). And we had always solved the problem printing new liras, again and again. We have never showed the world that we are able to reduce our debt through austerity, and then to keep it reasonably low. So, why on earth should anyone want to lend money to the Italian government?! I don’t understand. Ok, we will buy two or three years thanks to “massive monetization of the debt”… then what? What is more likely: that all Italians become Germans and show unprecedented fiscal rectitude? Or that the ECB every few years must begin a new bond purchase program to save southern Europe? If the latter, is it really sustainable? It certainly will mean higher and higher inflation in Germany, and higher inflation equates to higher taxation: “Inflation is taxation without legislation.” Milton Friedman. So, will the German tax-payer go on subsidizing southern Europe? While even northern Italy is completely fed up with subsidizing southern Italy?! Even if the German tax-payer would do so, can he really afford it? Mighty Germany balance sheet is reasonably sound, but it is far from pristine! I know that Germany is very mindful about exports and that a weak Euro could boost exports to the US and China, but, once more, is it sustainable? Any country with a trade surplus should have a strong currency, and Germany’s currency should be much stronger than the Euro presently is. Otherwise, unbalances are created: for instance, I don’t see how Italy could close the competitiveness gap with Germany, unless you presume that we will able to cut workers compensation by at least 30% (then, it means you are not aware of the strength of labor unions in Italy!). Maybe, there is something very important that I am missing, so I really would like to read your opinion on this topic! Thank you very much, giofranchi

You surely did Kraven! And thank you very much! Please, understand that people like anders and me put great emphasis on capital allocation, enjoy security analysis very much and take it seriously, but are not professional money managers. Like anders wrote, cash is just one of our assets. So, while certainly we have much more to gain listening to you than vice versa, we try to contribute to the discussion, adding some thoughts from a perspective that might be a little different. giofranchi

Yes! Right now I don’t remember exactly where I first read that judgment, but it rang true as soon as I did! And it stayed with me ever since! Many times you just experience something and then someone else writes about it and you click on it immediately! Imho, it is true and I live it every day. giofranchi

Kraven, What is exactly the “level of ownership” you are referring to? And why above that level should it be safe to think of stocks as parts of a business, while below that level it is more harmful than helpful? Most of you are money managers and for you it is perfectly fine to look at stocks as pieces of paper: you just can go on buying those pieces of paper that are the cheapest, waiting for their true value to be recognized, selling them, and looking for the next cheapest pieces of paper you can find. It is a perfectly sound way to become very rich! But businessmen generally don’t act that way. At least, no one that I know of acts that way (and I know and work with a lot of very successful businessmen). Businessmen don’t have the time to study how to jump safely from one piece of paper to the next. Allocation of capital is a very important responsibility, probably the most important one. But it is far from being the sole responsibility of any businessman. Businessmen try to judge the future prospects of a business, the soundness of its business model, the reliability of its management, and, if they like what they see, they try to buy it at a good price. Later, they do not sell, just because the stock price has advanced 30%. They think they will get much more in the future. It was E. H. Harriman who said: “I am not looking for a 15% return, I want something that will grow.” Of course, you must always recognize a very good bargain, when you see one. And at a certain price any business should be sold. The control ownership you referred to is something most businessmen experience every day. I personally control two different but related businesses. Anyway, even in control ownership it is surprising how much you must rely on other people! You are a business owner if you possess a machine that creates wealth and DOESN’T DEPEND ON YOU to achieve that goal. Otherwise, you don’t have a business, you just have a job. Every businessman depend on other people and their abilities and judgment. It is true that in controlled businesses the strategy is up to you, but for the execution you must always rely on others. And strategy, without a careful and effective execution, is useless most of the time. I am not here to say that control ownership and stocks ownership are not different. They surely are. But also in control ownership you must judge people every day, you must rely on them, and the ultimate success is much less dependent only on yourself than you might like to think. giofranchi

Thank you MrB! Always very interesting! When I look at some possible investment for my firm, I usually think of operations that I would like to own, and a team of managers that I would like to partner with, for the next 20 years. That would seem extreme to you… But, at the end of his career, Mr. Graham acknowledged that his gaining in GEICO had been more than all the other gains of Graham-Newman combined; similarly, Mr. Munger often said that the bulk of Berkshire’s returns might be attributable to their 10 best ideas, See’s Candies, GEICO, The Washington Post, Coca Cola, etc., all investments that Berkshire held for 20+ years. I really look for operations that might enhance my firm’s operations, and make it a stronger and more secure organization, for as long as my firm will last. giofranchi

No, absolutely! You are surely right! All I was saying is what I do, to choose those companies “whose operations I like to become parts of my own firm’s operations”. I was not saying what SHOULD be done! Vice versa, I hastened to point out that I don’t have any particular insights into over-leveraged situations, that sell for ridiculously low prices. They might be excellent investment opportunities, but I just don’t venture there. When I buy a business, I want its operations to really become part of my firm’s operations for as long a time as possible. So, I run a very concentrated portfolio, because I must know everything possible about those businesses, and I concentrate on the quality of their operations. And, in my experience, high-quality businesses very seldom are over-leveraged. Therefore, as you can see, I don’t have really nothing against great investment opportunities in over-leveraged companies at wonderful prices! It is just that my goal tends to keep me away from them. giofranchi

marodq, thank you for your first, very interesting contribution! I am not the one who should welcome you to the board (I am also new to the board) ... but welcome anyway!! ;) giofranchi

Write a put on something you wouldn't mind owning at the strike price of the put. :) However, you will probably have to have collateral set aside for your counterparty in the event the put is exercised. The best way to lever up with non recourse leverage is to buy a long dated call or warrant at an attractive price as measured by implied volatility in a time of low interest rates on a stock that you think is a good value. Then, you have the leverage of a margin loan that is non recourse beyond the price you paid for the LEAP or warrant. :) twacowfca, as it happens, I always agree with your writings, so you must surely be right! But I have still to find a broker in Italy that lets me buy long dated call options on a company listed on the NYSE… My firm has also a Tradestation account, but I don’t really like to always wire money overseas… Actually, I cannot say why: it would be much safer in JPMorgan than it is in Intesa SanPaolo!! :-\ Anyway, I reckon an investment in BRK, FFH, GLRE, etc. at book value the best way to “create my own free or profitable long-term float”. Through BRK, FFH and GLRE, my firm owns float and benefits from it. It is just that I am not the one to decide what to do with that float… oh well, I really don’t care much! I am very happy with my float in the hands of Mr. Buffett, Mr. Watsa, and Mr. Einhorn! I am positive that it is working for me and that it is ultra-safe. giofranchi

I couldn't agree more. That's why, the only leveraged companies I am interested in are insurance companies. As a rule of thumb, I look for insurance companies with management whose skills are above average, and with underwriting and investment leverage that are below average. That makes me sleep soundly at night. I am not a full time money manager. I run businesses. And I invest in companies that I like, as if their operations became my firm’s operations too. The only difference is that I don’t manage them personally. I don’t jump from one undervalued stock to the other. So, I have never thought hard enough about how good an investment in overleveraged companies at ridiculously low prices might turn out to be. I just don’t want the operations of overleveraged companies to be part of my firm’s operations. Therefore, I don’t look at them. At the portfolio level I agree with MrB. I don’t lever my firm’s portfolio. Right now I cannot remember exactly who was it, but someone once said: “A good investment is just that, leverage doesn’t make it any better or worse.” Probably, he used slightly different words, but I think the meaning is clear. Packer, thank you for the suggestion: I haven’t read that book yet, but I will buy it right away! giofranchi

I think the Hussman 2012AR just published can add a little perspective: on page 1 you can see the Hussman Strategic Growth Fund performance since inception. More interesting still, you can see its performance both with and without hedges. From 2000 until the first half of 2011 its true performance (hedged) was always superior to the hypothetical performance without hedges. It was just last year that the unhedged strategy outperformed the hedged one. Imho, that is a red flag about the state of the market, and should not be ignored. Furthermore, if you know Mr. Hussman, you also are aware of the fact that he completely missed the 2009-2010 recovery. An unfortunate “mistake” that neither Mr. Watsa nor Mr. Einhorn committed. Hadn’t he missed the 2009-2010 recovery, the Strategic Growth Fund performance would have been much better! I think he learned some lessons and won’t do the same mistake again in the future. Anyway, even with the 2009-2010 mistake, the Strategic Growth Fund is still ahead of the Russell 2000 Index and way ahead of the S&P500 Index. giofranchi annrep12.pdf

Thank you farnamstreet! Anything that could help me better understand the Berkshire business model is always very welcomed! giofranchi

Unfortunately, that is exactly what I am worried about…! So, undoubtedly that one is a reason, perhaps the most important one. But it is not the only reason. The S&P500 has more than doubled from its 2009 low, the Russell2000 is even more frothy, and I don’t like prices that double in what I think is still a secular bear market, in what I think is still an extremely overleveraged economy, in what I think is still a very weak job market (and don’t forget that the first jobless recovery was 1932-1937… the one we are living through is the second jobless recovery… a bad omen! “The Forgotten Man” by Amity Shlaes is a very good book on the topic, that probably most of you have already read). Of course, I do not even like the fact that all the money creation around the world had the effect to shrink the yield of “safe havens”, prompting investors to look for yield somewhere else, the stock market. Of course, I don’t even like that corporate margin are at a all time high: maybe it is legitimate to argue that a sector or two could go on expanding their margins, but, imho, it is very doubtful that the whole S&P500 could do so on a sustainable basis. It would mean that "Capital" in the future will be entitled to higher returns than in the past… Why? Ok, I know, that’s too much macro… and macro is unreliable! Let’s just put it this way: I am worried about my firm's future operating results and I don’t like prices that double in little more than 3 years! giofranchi

Amen!

Packer16, I have read the posts on gold that berkshiremystery was so kind to share once again. Intuitively, I agree with Parsad (though I enjoyed moore_capital54 very much!): I really loathe any graph that shows parabolic price appreciation! But my firm owns just 1,7% of its equity in gold… Let’s put it this way: My shorts are a protection against something I deem will probably happen in the next two or three years, something not pleasant, but not terrible at all: a 30%-40% retreat of the stock market. They represent a sizeable position. Summary: likely event; not pleasant, but not terrible at all; sizeable position. My gold is a protection against something I deem very unlikely to happen (think, we go back to the gold standard…), that will cause great dismay and uncertainty. It represents a very small position. Summary: very unlikely event; extremely unsettling; very small position. Parsad, I might be wrong, but, if we go back to the gold standard, also a graph already gone parabolic will shoot even higher. giofranchi

Packer16, truth be told, personally I don’t like Italian companies right now. If Italy stays in the Euro, we will be stuck with a very overvalued currency and will end up like Japan in a painful debt-deflationary spiral: our stock market will stay very depressed for a very long time! I just don’t see how we could be able to close the gap of productivity with Germany, which, vice versa, will go on benefiting from an undervalued currency. Imho, if Italy stays in the Euro, that gap will get wider and wider. Instead, if Italy leaves the Euro, the new Lira will depreciate by 40%: it is only then that I would buy a basket of very undervalued Italian stocks! I really think that prices can be deceiving in Italy right now: take for instance Cattolica Assicurazioni. It is an Italian insurance company with €1,3 billion in equity, €15 billion in total investments, of which 90% are in short and medium term Italian government bonds. Right now it trades at 0,45 x book value. And for good reasons! What if the Italian government defaults on 15% of its debt? Is it so far-fetched? How would you incorporate that risk in your assessment of the worth of the company? I really don’t know. My only answer is to stay away. Yes! Even if 0,45 x book value looks like a wonderful price for a company with an history that goes back 116 years! Well, actually we can always believe that modern countries cannot default, and we can always assume that Italians will all become Germans… then, yes!, everything will be OK and Cattolica Assicurazioni is a great bargain! ??? giofranchi

Ed Thorp was one of the first to model that type of long/short strategy in a systematic way. It produced returns of about 20% per annum during the first 10 years he used it, but only about 6% per annum when he gave it up to the increased competition about a decade ago. twacowfca, I am not saying that I will never remove my hedges! I am just saying that, in an environment that made Leucadia’s managers state “opportunities meeting our investment criteria are few and far between”, I am not comfortable being greedy, and I am satisfied to get a 6% per annum return as the spread between my long ideas and the hedges I put in place. If and when valuations improve, I will surely remove all my hedges and I will be fully invested, employing a long only value based strategy. Anyway, it is clear by now that all of you disagree with me. So, probably, it is true that there is some weakness in my temperament… just like PlanMaestro suggested at the beginning… He stated: “The only thing to conclude is that that investor doesn't have the temperament for the game and he would be better off buying an index fund and forgetting about it.” …Hey! Wait… Buy an index fund?! I would never do that!! Actually I am shorting indices right now!! Ahahahahahahah!! I am utterly hopeless… :( giofranchi

Actually, I haven’t found the threads on gold… Thank you berkshiremystery for posting them again: always very helpful!! giofranchi

I hasten to point out that what I wrote about Mr. Gayner was just meant to emphasize the soundness of the Berkshire-type business model, not to underestimate Mr. Gayner’s abilities as an investor! Far from me! I have only the greatest respect for Mr. Gayner and I will very gladly invest with him. I am also comfortable with the fact that, due to the soundness of the business model, and paraphrasing Mr. Buffett, a manager doesn’t have to do extraordinary things to get extraordinary results! giofranchi

writser, I agree with you that the message is much exaggerated and extreme! I just thought it could always be useful to listen to people who don’t agree with our viewpoint. Being able to find flaws in their reasoning, usually add strength to our own reasoning. At least, that is how it works for me! Anyway, I apologize for posting something not worthwhile… In the future I will be more careful! giofranchi

txlaw, I never said “don’t buy bargains”. I just said “buy bargains and buy some protection”. At Leucadia National they are reducing debt (which is another form of protection), while guaranteeing: “Never fear, if a good deal comes along we will find a way”. Mr. Julian Roberston said: “I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.” Is there a time when you should be content to just lock in the spread between the great bargains you have purchased and the worst 50 stocks you could find? Or a fully invested long only strategy is always the best way to use capital? giofranchi

Cardboard, I don’t like the fund of funds idea either. It is not that I judge unfair to pay someone who lets other people do all the hard work… I believe in paying for performance, not in paying for number of hours worked. If someone could identify the 5 fund managers, who will have the best track record for the next 10 years, I will pay gladly for his services! Instead, I don’t like the fund of funds idea, because I don’t like the mutual/hedge-fund industry. It has got a fundamental flaw that systematically leads to both unpredictability and underperformance. In the words of Mr. Ackman: “The principal weakness we share with most other money managers is the fact that our capital base is not permanent, and we therefore keep cash on hand and/or own passive liquid investments which we can sell to meet potential investor demands for capital. To address this weakness in our open end hedge fund structure, later this year, we intend to launch the private phase of Pershing Square Holdings, Ltd., which we expect to eventually list on the London Stock Exchange.” I didn’t invest in Pershing Square the hedge-fund, but I will be happy to invest in Pershing Square Holdings Ltd. at an attractive price. Paraphrasing Mr. Buffett, investing is really the best business, and I always like to quote Mr. Munger: “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…” You could show me a 100 pages report on the future of Apple, and give me all the right reasons why it won’t end up like General Motor one day, and you will anyway fail to convince me… Instead, I am convinced that a Berkshire Hathaway, led by Mr. Buffett and Mr. Munger, will never fail. Of course, you need to know and bet on the jockey… but he or she doesn’t really have to be a genius! Take, for instance, the Tisch family of Loews Corp.: arguably, they have never been as successful as the Mr. Buffett and Mr. Munger pair, but they achieved a 15% CAGR in stock price for 50 years nonetheless! That’s 1000 times their original capital: an astonishing creation of wealth! Or take Tom Gayner of Markel Corp.: he almost only invests in blue-chip stock at fair prices, anyone with a Morningstar account could do that! Well, Markel Corp. has achieved a 17% CAGR in book value per share for the last 20 years. Not bad at all! Add, on top of all this, the benefit of float, and I think it is easy to understand why I like FFH and GLRE so much! Now, to your question about my “macro worries”: while I undoubtedly could stomach a 30%-40% decline in stock prices, I’d lie, if I say that it would be easy. Certainly, it would be much easier with a lot of cash at hand to scoop up bargains! Furthermore, despite the fact that I am my firm’s largest shareholder, I am not the only shareholder. And I am not so sure that my partners would be so calm and cool headed as to think about the long run, while drowning in a storm… If I am forced to cut or even suspend the dividend, because of a 30%-40% decline in equity, I will have to answer unpleasant questions! More: we are still relatively young (got incorporated in 2004 and started doing business in 2005), and our business model is still unproven – I try to squeeze as much free cash as I can out of engineering consulting operations, that need almost no maintenance and growth capital, while redeploying all that cash in “Berkshire Hathaway kind of businesses” at fair prices – So, it is also a matter of confidence: I am willing to leave some fiches on the table now, to safeguard confidence, should something go wrong. Finally, my firm operates in Italy, and the business environment in Italy right now is dire. Even more so in the civil and infrastructure sector! Engineering operations will surely suffer and won’t generate as much cash as they did in the past… at least for a while. To put a 30%-40% decline in equity on top of that, would be really imprudent of me! giofranchi

Cardboard, I didn't say that I cannot understand AIG, but just that I have not studied that company. I have read what has been written on this board about AIG and I find it very convincing. But I won’t make an investment on that basis alone. Instead, I should spend much more time on AIG: at least, as much time as I spent on FFH and GLRE. Unfortunately, my company is an engineering firm and I have also other responsibilities, besides trying to allocate the free cash it generates the best way that I know of… I just don’t have the time to study every investment opportunity that comes along! As long as insurance is concerned, the first thing I look for is a really good management. That’s why I chose to study FFH and GLRE, while giving up on AIG. That’s not to say that AIG’s management is worse than Mr. Watsa or Mr. Einhorn and their teams! Please, don’t misunderstand me! Maybe, AIG's management is even better! It is just that I had read Mr. Watsa’s shareholders letters and found them very interesting and thoughtful, I had read Mr. Einhorn’s book “Fooling Some of the People All of the Time” and found it very informative. So, it just happened that I knew something about Mr. Watsa and Mr. Einhorn, while I knew nothing about AIG’s management. That’s all! And, don’t worry, I don’t charge any fee for allocating my firm’s free cash!! Now, the “riding someone else coattails” thing is true! But I think that Mr. Buffett studied and showed the world one of the greatest business model of all time. And I really like to partner with someone who have understood Mr. Buffett’s lessons and has been able to replicate that business model. An investment in Berkshire Hathaway in the 70s would have meant “riding Mr. Buffett’s tail”, right? Well, I would have liked it very very much nonetheless!! Maybe, I let Mr. Watsa and Mr. Einhorn choose my investments, but please consider two things: 1) they work with float, while I cannot; 2) to let Mr. Watsa and Mr. Einhorn choose my investments gives me the possibility to work harder on my firm’s engineering operations, that way hopefully increasing its free cash. And don’t think that I don’t like doing some research or finding new ideas: I like it very much! It is just that I don’t have as much time to do that, as many of you probably have… But I do research as much as I can! As a side note, most of what I write might seem naïve to many of you. Many of you are long dated and very successful money manager, while I am just a CEO who tries to give the deserved importance to capital allocation. Please, bear with me and be patient! Even if I have much more to learn from you than vice versa! Thank you very much! giofranchi

I know that most of you do not even want to hear talking about gold… Anyway, I think I have just read a very good piece on the topic, and I share it with you. At the end of his article Mr. Williams quotes Mr. Pal, from a presentation he made in Shanghai last May. I also attach Mr. Pal’s presentation. You might think that macro is just a waste of time, but please look at slide n.25: “The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives… Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations.” That is not macro forecasting! Those are actual numbers! Who is on the hook for all that debt? I am aware of the fact that American banks today are much better capitalized than they were in 2008, but, if European and Japanese banks will plunge into a real crisis, do you see American banks get along completely unscatched? Even if your answer is “Yes!”, wouldn’t you sleep more soundly, knowing that you also own some gold just in case? “Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” Seth A. Klarman - October 20, 2007 – MIT Remarks giofranchi 533_eva8.31.12na.pdf Raoul_Pal_May_2012_Shangai_Presentation.pdf

If you don’t like shorting a single stock, there are of course many other ways to buy some protection: 1) shorting indices through put options or swap contracts (like FFH is doing), 2) shorting indices through ETFs, 3) investing with those managers who buy protection (Mr. Watsa, Mr. Einhorn, etc.), 4) keeping a higher percentage of cash than usual, 5) buying some gold. Imho, the idea is very simple: during a secular bear market, you want to invest aggressively only when prices are depressed and nobody wants stocks (you will have plenty of opportunities!), the rest of the time you’d better be cautious and strive to preserve capital. You know, I am really no finance guy, I am an engineer and a businessman. I know few finance guys, but a lot of businessmen: and no businessman I know of does it, without buying some insurance! Not a single one. Everyone knows that even the best business is dealing with uncertainty. And acts accordingly. If mighty Nestlé buys insurance against the price of cocoa, why should we disregard the importance of some protection? giofranchi

"John Templeton made a good deal of money for his own accounts in 2000 by a twin-track strategy of shorting shares in Internet stocks and making a leveraged bet on long-dated U.S. government bonds, which he expected to rise sharply in price as interest rates continued to fall. TEMPLETON'S Way with Money giofranchi