giofranchi
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Posts posted by giofranchi
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Thank you very much! :)
Gio
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Hi Gio,
Is this from Stiles' First Tycoon book?
If so, which page?
Yes, it is! Page 421 :)
Gio
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This might very well be the most important paragraph in business literature. ;)
Cheers,
Gio
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Awesome, congrats Keith!
+1! :)
Gio
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So the lessons are, one, you are on your own, doesn't expect your holdings to grow stronger in a recession, their mgmt may freeze due to their temperament.
Another fact: anyone who is invested in FIH (Fairfax India Holdings) knows very well our capital is still parked in bonds and cash. Evidently, Watsa & Co. are encountering some difficulties in deploying it through the Indian stock market, because prices have recently gone up so much… By the end of the year we should see the first investment, or at least that’s what Watsa has said, but FIH is looking for at least 6-7 businesses in which to invest. At the rate of one idea per year, it will take 6-7 years before we are fully invested…
Except, of course, a market correction comes sooner! ;)
In other words, how you can be invested in FIH, without hoping for a market correction and without relying on Watsa’s ability to take advantage of that correction, is beyond me.
Cheers,
Gio
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Two, even the best companies will drop in a recession and you'll see it in your own portfolios plummeting value, and you'll consider selling and not buying.
I think there is something else to be said about this: I concentrate my investments in only a few companies because I want to have great conviction in any business that I own. And the reason I want to have great conviction is precisely because I want to be able to average down as stock prices decrease. In other words, I seek to replace, in part at least, the temperament needed to buy when others are selling with a strong conviction about what I am buying. Until now I have been successful in doing so… This of course is not to say I will be successful in the future too… I hope so, but we will see! ;)
Cheers,
Gio
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Well said KinAlberta!
In addition, despite what an individual investor may state now about themselves and their risk tolerance---there is no way of knowing how that individual with react during a protracted bear market. Will they be able to hold onto their existing positions that have dropped 30, 40 or even 50% or more? Will they be able to deploy additional capital at or near a market bottom? Perhaps more importantly --- will their circumstances allow them to hold on? Deploy additional capital? By circumstances I mean their employment/personal situation may change drastically from what they expected or they may need to use their liquid funds for some unforeseen expenditures rather than investing in value bargains.
There is a segment of the population that simply cannot tolerate even temporary declines in the value of their portfolios. For them---avoiding any "loss" of capital (even one temporary in nature) is a much bigger motivator than achieving outsized returns. I suspect that a manager such as Patient Capital would very much appeal to this type of investor.
You should always draw a line between investable funds and funds hold for living. Those who don’t lack the basics of investing, and I seriously doubt they get to know a manager like Patient Capital well enough… But who knows? You might be right!
A person who has diligently set aside enough cash to live (cash I never even think of investing! And therefore I would never entrust even to a manager like Patient Capital!), and enjoys the ability to generate substantially more free cash to invest (like I luckily do!), might lack the temperament to invest after a 50% correction. There is no doubt this is true. Like there is no doubt what Packer said is also true: to outperform, you must have such a temperament! ;)
One of the fears I have about the market correction in 2008-09 is that once it reached bottom it basically went straight up from that point due to central bank intervention. So even the most nervous investors made out okay provided they were able to hold on through the bottom. I am not at all certain that those same investors would be able to hold through several years of a flat lined market after a severe downturn.
Well, that would be hypothesis a), wouldn't it?
Cheers,
Gio
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In mid 2008 I went to 80%+ cash (selling 20yr positions in Canadian banks, etc but keeping BRK) and moved some money into some cash rich companies (Appl) and companies that had a history of being opportunistic in bad markets (eg Loews). Everything dropped in the market downturn and most companies did little to be opportunistic. APPl did nothing. Loews funded CNA. I ended up having to double up on APPL at 90 to gain from it. Added to BRK a couple days before it bottomed. (My biggest single purchase ever.) So even though BRK was clearly being opportunistic, its shares still crashed as existing shareholders panicked and dumped BRK.
So the lessons are, one, you are on your own, doesn't expect your holdings to grow stronger in a recession, their mgmt may freeze due to their temperament. Two, even the best companies will drop in a recession and you'll see it in your own portfolios plummeting value, and you'll consider selling and not buying.
Of course I have said stock prices may go down by a lot! In fact hypothesis b) could not be possible otherwise!
For what I know in 2008-2009 Buffett, Watsa, Malone, Biglari, and others behaved very opportunistically. Though I agree I could be tempted to consider selling and not buying in a market crash, I hope those people might instead behave differently. Like they have already done in the past. Because, if they don’t, the problem won’t be a market crash, the problem will be I have chosen the wrong entrepreneurs and the wrong businesses. Therefore, I agree we all are on our own: choose the businesses you own wisely! ;)
Cheers,
Gio
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Mr Maida is fanatical about protecting the capital already in place. For me personally---this is the key criteria.
What I am not sure I understand well about these funds which hold lots of cash and justify their decision by saying their main objective is “to protect capital” is the following:
With the exception of a new Great Depression, I am quite positive all investments of mine would grow much faster in a volatile environment than in a muddle through scenario… I actually think a 30%-40% market crash would make the companies I own stronger… not weaker!
Of course, in a market crash, as the fundamentals of those business improve, their stock prices might probably go down with the overall market… and would probably go down a lot!
But, if the fundamentals of those businesses improve, how can my capital not be sufficiently protected? Even if stock prices go down?
Therefore, imo it could be either
a) They truly fear a new Great Depression
or
b) Their true aim is not “to protect capital”, but “to buy assets very cheaply, when they become available”.
Cheers,
Gio
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Second, the performance itself has not been horrific IMHO because in absolute terms this guy has not lost the principal, whose protection is more or less his goal AFAIK
Well, imo the performance has been good. I might agree with what Packer has said, but I also think the performance has been satisfactory enough. And to go from 0 to 1 billion is no small feat at all! ;)
Gio
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But this question doesn't actually ask anything. Why do people do irrational things? Why is there money in mutual funds if 85% underperform? Probably the answer is, he's good at selling.
Selling a bad product/service over the course of 15 years... I cannot imagine a hardest thing to do! ;)
Gio
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But is that comfort worth an additional 1% a year? PC reminds me of the Charles Allmon of GSO and Frank Martin, folks who over time hold so much cash that they underperform. I have yet to see someone who holds this much cash alot of the time waiting for the decline to beat an index over time (unless you are Baupost) and this guy is not Baupost.
Packer
Generally I agree.
But how then has Maida succeeded in going from
???virtually no assets under management in March 2000 to a business managing almost one billion dollarsGio
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I largely agree with this, but I have also seen some controlling shareholders shaft minorities quite deliberately. For example, how would you feel if ordinary voting shares at FFH did not have tagalong rights? That would only be dangerous *in theory*...but I wouldn't touch it with a bargepole.
Ultimately I want my interests aligned. Legally, that can only be achieved by owning the same share class. Morally, it might be achieved if the controller is totally trustworthy. But you can never be sure of that, so on balance I prefer the legal method.
Pete,
I understand… Yet, I have repeatedly witnessed that in business, if you rely on the legal method for things to work out well… well, things simply will not work out well!
There is no substitute for carefully judging and knowing whom you are partnering with. And basically what you want to see is a deeply rational human being. Everything else imo follows.
Gio
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My point, Gio, was that I understand those who argue that entrepreneurs should maintain control by owning >50% of the same shares that everyone else owns, like Buffet does.
I *do* think that companies with multiple share classes are, broadly speaking, less attractive than those with a single share class. I prefer to own exactly the same shares as the controller.
Pete,
As I have said in my previous post, imo that’s only theory.
In practice, instead, I don’t care how they maintain control over their companies… as long as they do what’s necessary to maintain it!
In practice, instead, what I would like to see is they maintain a large percentage of their wealth invested in their companies (for Watsa it is more than 85%!).
In practice, instead, what I would like to see is they maintain the desire to run their companies as effectively as they have done in the past.
And I am getting less and less interested in theory, while more and more interested in practice.
Cheers,
Gio
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"their companies"...
Amen globalfinancepartners
This is too naive…
The companies I am interested and I invest in are founded, managed, and made to grow by one person. To think otherwise is imo a mistake. The fact those people are able to surround themselves with very capable managers does not change that reality at all. Consequently, they are the ones who take all major decisions. No one can do anything they do not want nor agree to. Period. If something like that should happen, I would cease to be interested in those companies, and I would sell.
If they exercise such a control by ownership, by a double class share, or by other means specifically devised for such a purpose (a la Biglari), is nothing but theory. Practice is always the same: all other shareholders are spectators (albeit ones who become richer and richer in time!). And the choice they have is simple: to hold or to sell their shares.
You might like it or not. Personally, I like it very much: I am a liberal who loves dictatorship in business! (And my company works exactly this way!) But whether you like it or not doesn’t change how things actually are: no one has ever chosen nor done anything against Buffett’s will at Berkshire, no one will ever choose nor do anything against Buffett’s will at Berkshire as long as he is alive.
Imo the sooner we accept this, the better! ;)
Cheers,
Gio
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"their companies"...
By now you all know very well what I think about the subject... Nothing else to add really! ;)
Cheers,
Gio
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I totally understand why multiple voting shares attract scepticism.
I don’t. Actually, it is the right opposite for me: I look with skepticism at entrepreneurs who think they can keep control over their companies only thorough strong business results over a very long period of time. They are acting naively imo, instead I want to see great pragmatism in everything they choose and do.
Gio
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Obtuse_investor asked me via twitter what I think about this… Since I have still to figure out how to use twitter (how can you reply with only 140 characters at your disposal?!), I’ll write what I think here:
If you follow the discussion about BH, you know very well how I think about business: imo BH is Biglari’s business just as much as FFH is Watsa’s business, all other shareholders (or at least the great majority of them, with the possible exception of Barnard, Bradstreet, and the like) are only watching, enjoying the show, and getting rich without the slightest effort…
Therefore, what I often repeat about BH imo holds true for FFH too: watch what Watsa is doing, if you like it hold your shares, if you don’t sell them. Period.
I am holding mine! ;)
Cheers,
Gio
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dcollon has just sent me this great pdf file: and I guessed it might be posted on this thread! :)
Cheers,
Gio
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In other words, if I were a Canadian and owned 1 FFH share, and FRFHF increases 30%, while the CAD depreciates 13% against the USD, and if I want to sell my FFH share and use the proceeds to make a trip across the border, my purchasing power would be exactly the same if my FFH share had increased 43%. That’s what cwericb said it has happened, and that’s what I mean by an exact hedge.
Gio
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What do you mean with an exact hedge btw? How could it ever be? The fluctuations between those two different shares have nothing to do with all the underlying assets and liabilities, partly nominated in various currencies, and are just different currency quotations of the same thing. I'm confused.
Fairfax may indeed be a hedge against USD / CAD movements, but if it is, it must be because of the underlying assets they own, not because their financial results are quoted in CAD, YEN, USD, or Gold... it's irrelevant.
I do agree but:
Of course FFHs assets are not 100% in the US. Yet, cwericbs example shows an exact correlation between the difference in FFH USD denominated share price and FFH CAD denominated share price, and the USDCAD exchange rate.
How is it so?
Thank you!
Gio
Gio
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The bottom line here, for me at least, is that I find Fairfax to be a comfortable investment for three main factors. First, Fairfax is a good company for various reasons. Second, it’s share price fluctuates with the US dollar and provides me with protection against a fall in our currency. Thirdly, it is also a hedge against deflation.
If one or two of those factors becomes a negative, I have hope that the remaining factor or factors will help offset that, at least in the long run. So I see it as a relatively safe place to invest.
The biggest concern I have with Fairfax is if we run into several catastrophic events that seriously impacts the insurance industry. However, should that happen I assume that it would precipitate a hard market in the industry that might drive some competition out of the business and would also lead to higher premiums and thereby increase the float over time. Am I correct in that assumption?
+1! :)
Gio
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The two shares represent the same asset. The same asset should have the same price. Hence the only difference is the exchange rate the two are quoted in.
Ok… Therefore, who is right? Is FFH a “relatively decent” hedge against USDCAD movements, or is it an “exact” hedge?
Gio
PS
Not that I care much... Just curious! ;)
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Men are rather reasoning than reasonable animals,
for the most part governed by the impulse of passion.
--Alexander Hamilton
I have started reading [amazonsearch]Alexander Hamilton[/amazonsearch] by Ron Chernow, and so far it is an highly recommended piece of historical biography.
Cheers,
Gio
Space X
in General Discussion
Posted
+2
Gio