giofranchi

I think b) might be a very good guess! ;) Gio

They call 1.6x a “rich multiple”… Prem Watsa and “rich multiple” don’t go easily on the same page… We will see! ;) Cheers, Gio

Yes! You are right. But imo the fact this transaction is immediately accretive to Fairfax on the investments per share metric, with underwriting operations that are very much profitable, justifies the multiple paid. If you can make a 12%-15% return on tangible assets through underwriting operations, then send the float to HWIC for investments, I guess you can achieve very interesting overall results! Cheers, Gio

Closing adjusted net tangible assets per share at the end of 2014 first half was 179.4 pence. If we use that number, the multiple paid is: 305 / 179.4 = 1.70. If Brit PLC during the second half of 2014 has achieved results in line with the first half, net tangible assets per share might be 10% higher, therefore the right multiple paid might be: 305 / 197.3 = 1.55. Gio

From a brief glace I have given to the 2014 First Half Results of Brit PLC (see attachment), I like what I see: - Annualized return on net tangible assets of 25%, - Combined Ratio of 88.3%, - Premium growth of 4.5%, - Investment returns (non-annualised) of 2.1%. To be able to purchase such good results for less than 10 times earnings is something I cannot but like very much. Their investment portfolio surely is conservative, but now that they are backed by the Fairfax Balance Sheet, the managing of their investments could be left in the capable hands of HWIC. This would further enhance return on net tangible assets. It reminds me somehow of Lancashire: managing through a difficult environment, while waiting for a market shift to show once again their true capabilities and potential. This is exactly the time when you want to invest in companies like these. Cheers, Gio 2014_Half_Year_Full_Report.pdf

I agree with this 100%. Except that again in action we differ: I prefer to make implicit macro bets, instead of explicit ones. Meaning that I still prefer to invest in businesses that will thrive if my macro bets turn out right, instead of playing the game of asset allocation. I find asset allocation too hard, because I never can muster confidence enough to average down in a position that is going against me. And whenever I cannot do that, I know something is wrong. Gio

Very interesting! Thank you! :) Gio

The problem I have come to realize I have with a “cash pile” is that for me to hold it would implicitly mean I believe I could do better with it than Watsa or Marks (or, if you want, Dalio). It is true both Watsa and Marks lead large organizations with lots of capital, while I have small size which favors me… But besides this they have all kinds of advantages working for them! And it just seems a bit hazardous to make the assumption I will be able to manage my market hedges and my cash pile to a better final outcome than they would… Do they agree with your thesis of a slow growth environment? Mostly yes! Like I do. In action, though, we differ: while you hedge and keep a cash pile, I prefer to invest in those companies which imo have prepared themselves to thrive in a slow growth environment. Do you worry about valuations? General valuations, yes! And I share your worries. But the valuations of those companies which have prepared themselves to thrive in a slow growth environment are very much reasonable. And the reason why they are not expensive is precisely because they have prepared themselves to thrive in an environment the general public has not yet come to accept as inevitable nor even likely! Finally, in which currency to hold cash? Until a few months ago it was almost a no-brainer to hold USD: practically all the companies I am interested to own have assets denominated in USD and the EUR was strong… Right now, though, things have changed: the EUR has much depreciated against the USD… If I keep USD, I risk a paper loss as the EUR might rally against the USD… If, instead, I keep EUR, and in a market crash the flight to safety makes the USD further appreciate against the EUR, the purchasing power of my cash pile might still get significantly diminished… So, who really knows? Gio

ni-co, I don’t understand: if no great business might work in the future, how is Bridgewater supposed to work?… Bridgewater is a business itself! What I am saying is very simple: if you think Bridgewater might work in the future, very well then: invest in Bridgewater! Or in anything which share with Bridgewater similar characteristics! Do you envision instead a world in which no business might work in the future? Well, if that is the world that awaits us, I am sure Bridgewater will go bust. Gio

Paul, Insurance and fastfood franchising are two wonderful businesses to own in a recession, and the ones I have are led by opportunistic entrepreneurs who might take advantage of a difficult environment and will have the cash to do so. This is all I can tell. Will they thrive? Who knows, right? But that's not the point, the point is: find the companies and the entrepreneurs you think might do well in a difficult environment and invest in them. Hold cash if you can find none. Cheers, Gio

Never promise! ;) The point is: if they won't thrive, no one will. If they won't make sound judgments with their cash, no one will. Or, if you know someone who will, well then invest in his/her company! What else are we talking about? Gio

Moreover, who are the haves and who are the have-nots today? I would put both Klarman and Watsa among the haves, wouldn't you? Yet, I believe that in a market crash they would benefit enormously... Similarly, I would put Marks among the haves today... But he too in a market crash would benefit a lot! Biglari is another that would benefit in a market crash: people would go back to eat more cheaply, therefore fast-food operations would do very well, and he has lots of cash to take advantage of opportunities. As you see, I am concentrated in 3 equities, which as you say might behave like a single equity in a market crash... But from a purely business perspective I believe all 3 will thrive in a difficult environment. So, would you say because I am all in equities I don't realize what I am doing like Ackman? And what if Ackman chooses his investments the same way: the haves of today, which will have even more, should a market crash come? Gio

Thank you ni-co, What you meant is now clearer, to me at least! Let me ask you a question: is yours a financial worry, or is it a "true business" worry? I mean: I am very well aware of the fact stock prices could get crushed in the next 2 to 3 years, but what about the revenues and the earnings of a business that generate lots of cash today and is debt free? Do you see them decrease dramatically in a long recession? Take Allergan, for instance, do you think people might stop spending for their beauty? Gio

I don't understand why you say this. Imo great businesses are not very much affected by recessions or even depressions: Carnagie Steel increased its earnings during each year of the depression in the 1890s, Standard Oil weathered the Great Depression very well, Berkshire sailed through the 1970s as a walk in the park, with its stock price which always kept increasing, Apple didn't even notice the Great Recession... Etc. Imo what matters today is looking for those businesses which might be very well positioned to take advantage of any dislocation in the markets that might come our way: high quality businesses, which generate healthy levels of free cash flow no matter what the economy does, with little or no debt, and lots of cash at hand to take advantage of opportunities. It seeems to me that's the kind of companies Ackman is focused on, with the added benefit of implementing changes required to make their operations more efficient! Gio

Definitely! Q4 underwriting results are even better than overall 2014 results, which are better than 2013 results, which were considered an outlier at the time! If something goes wrong, even if only for a couple of years, Fairfax will have many ways to make money, beginning with their insurance operations that are becoming more and more reliable and profitable. Cheers, Gio

Interesting! ;) But what do you mean exactly by “restructuring company”? Thank you! Gio

Joel, Of course, you are right. But I don’t think your reasoning considers another psychological obstacle: to invest a very large percentage of your capital in a single business is hard. With only three large positions right now I think I have a portfolio more concentrated than most, and Fairfax today represents almost 43.5% of my portfolio. It is already by far the largest investment I have ever held. My cash reserve is around 18.5%… If I use it to buy more Fairfax, I would be making that single investment 62% of my portfolio… It might be the most rational thing to do… But, as much as I like Fairfax, I am not prepared for that yet! ;) Cheers, Gio

Ahahah!!!!... Anyway, no!... I have just increased my investment in FFH meaningfully… Would I have done so, if I thought the stock market might be completely immune to high prices and high debts? Of course not! ;) What I am saying is that, rather than holding cash, in this environment I'd prefer to own a business that will do fine enough, if nothing bad happens, and might turn out to be a spectacular investment, if a deflation scare actually occurs. Of course such businesses are not many. I can think of Fairfax, of course, and maybe Oaktree (which might be able to increase AUM rapidly in a deflation scare). And that’s why I also hold some cash... But, if I could find another business with those same characteristics (namely, that could perform satisfactorily in a muddle through scenario, and could perform even better in a difficult environment), I would gladly part with my cash. Cheers, Gio

It might be… But it seems we have become exceedingly efficient in engineering permanently high asset prices… I don’t know… We will see! ;) Cheers, Gio

Yes, I enjoyed this book too. I already had a great esteem for Mr. Keynes as an investor, and the book made me appreciate him even more! :) I would also suggest to read [amazonsearch]The Forgotten Man[/amazonsearch] by Amity Shlaes and [amazonsearch]The Great Depression: A Diary[/amazonsearch] by Benjamin Roth. Gio

Pete, whenever I find an investment that truly convinces me, I invest. Period. I don’t mind about a low-cagr, high volatility environment. The problem is those opportunities I really like don’t come often. So, what to do while I am waiting? Joel’s paper seems to suggest that it is better to wait invested in a low conviction idea (let’s say for instance a S&P500 ETF today) than to hold cash. And from a purely statistical point of view I might agree with him. But I think this conclusion doesn’t take into consideration the psychological side of the matter: especially for those people who run very concentrated portfolios, I think it is extremely difficult to stay invested in low conviction ideas, waiting for the proverbial “right pitch”… Because the very idea of shunning low conviction ideas is a cornerstone of their investment process. In other words I always look for “absolute” values, not “relative” ones. And, though statistically it might be the right thing to do, at least psychologically it is very tough to switch from an absolute value mentality to a relative value mentality. Surely that’s the greatest difficulty I encounter in my asset allocation strategy. Cheers, Gio

Of course the problem is: how much time might QE actually give us?… I don’t know and I am not playing that game! ;) Cheers, Gio

Imo QE will do what it has always done: it will buy us some time. That’s what liquidity does. Because money flows into financial assets, making their prices rise. And almost by definition, when asset prices rise, a deflation scare is averted… or at least postponed! The real question imo is: what will happen when financial assets finally reach prices that cannot be inflated anymore? And debt levels are still too elevated? At that point I don’t see how even liquidity could still be of any meaningful help. Gio

With Europe now truly printing money, I think a deflation scare might be averted for the next 2 years… Instead, we will probably witness a meaningful increase in European stock prices… Later, when also the ECB largesse has run its course, with high asset prices on both sides of the Atlantic, and debt levels probably still very high, deflationary forces will be back in full swing… then, watch out! ;) Gio

Nobel Winner Shiller Joins Pimco in Saying Buy Greek Assets http://www.bloomberg.com/news/articles/2015-01-27/nobel-prize-winning-economist-says-it-s-time-to-buy-greek-stocks Gio