giofranchi

Well, but they have to approve it each time, don't they? Or is it utterly automatic? If so... ok, just a coincidence!! ;D Gio

You might say this doesn’t mean anything and the repurchase of Subordinate Voting Shares is very limited indeed… Yet, it strikes me as an odd circumstance FFH declares the intention to repurchase some of its shares just 2 days after I asked if it were a good idea to buy FFH again… ;) Gio PRFFH-Sept-23-2014-Normal-Course-Issuer-Bid.pdf

Or let’s look at it another way: Supposing these two ratios don’t change in the future, Investments / BV and Investments / BV less goodwill and intangibles, an annual return from investments of 4.83% (or whatever it is, taking interests and taxes into consideration, but hopefully also some underwriting profitability) will be required to compound BV at 15% annual, while a return of 4% will be required to compound BV less goodwill and intangibles at 15% annual. If at the end of the 25-30 years period Mr. Market still values FFH 1.15 x BV or 1.3 x BV less goodwill and intangibles, shareholders return will obviously be 15% compounded annually. Therefore, the only interest we might have in those two multiples, 1,15 x and 1.3 x, is to answer the question: how likely is it that Mr. Market might grant those same multiples to FFH in the future? In other words, is there a risk of multiple contraction, or not? Imo not only there is no risk of multiple contraction, but there is also the possibility of multiple expansion! Because, if FFH truly achieves those annual returns on its portfolio of investments for such a long time, it will be most probably regarded by the market like BRK is today. Gio

Either I am right that we as shareholders own BV, or you are right that we as shareholders own BV less goodwill and intangibles, I guess we might agree on the following: Today, anyone can pay $448.5 and get $1,200 in investments supervised by someone of the caliber of Watsa and Bradstreet. Investments that will probably grow thanks to the increasing float generated by an insurance global conglomerate whose operations are supervised by someone of the caliber of Barnard. Gio

Great presentation that I think might fit very well within this thread! :) https://gallery.mailchimp.com/443e8872e35ccdde12b72e8cd/files/BAM_YPO_Presentation_Sep_14_.pdf Gio

I don't think so. If I am right about FFH future compounded growth, it doesn't matter if it is 1.15 or 1.30... It doesn't matter at all! It will be a very satisfactory investment anyway. As I have said I was not putting any multiple on top of anything. On the other hand, if I am wrong, 1.15 or 1.30 won't matter either. It won't be a very satisfactory investment anyway. Gio

Ah! Here it comes! I guess BAC instead isn’t supposed to depend on management, right? Even after what Mr. Lewis has been able to do with just a couple of very stupid decisions some years ago, right? --Charles Munger It is always both: good people and good business. One without the other is the only true optical illusion! ;) Gio

Of course! How could it be different?! Other insurance companies cannot even dream of compounding BV at 15% for many years to come! How could the market allow them an higher multiple?! Listen, it is very easy: either you are right about FFH future, or you are wrong. Period. If I am right, FFH today is very cheap. If I am wrong, FFH today is priced like Mr. Market prices any other insurance company. Great upside if I am right. Small downside if I am wrong. Gio

The double counting is when you are fixated at the low P/B... yet the "low" P/B isn't that low at all. So by looking at something that makes the premium invisible, your mind is being tricked by an optical illusion. You are then trying to put a premium on something that has already had a premium put on it... without regard for measuring the premium that is already there (that's the double counting). Eric, I told you the exact math I use. I am not putting any multiple on top of any number. I am just trying to understand what shareholders truly own today. How that could reasonably grow in the future. Then, discount it back to the present. It is only math, so if wrong it should be mathematically proven incorrect. Not philosophically... Your philosophical response doesn’t help me in the least. PW every quarter reports to shareholders BVPS, not BVPS less goodwill and intangibles. Therefore, he feels it is BVPS that we own as shareholders. And I believe him. I call it BVPS0. Then, I make an assumption for a rate of compounded growth of what we own today. To make no assumption for the future, obviously, is not possible, if you want to understand what IV really is. I think 15% is achievable, because it entails a return from their portfolio of investments of about 6%-7% annual. You might say that is no small feat, but it is way below their average of 9% until now. But you can choose whatever compounded growth you think is most reasonable to expect. This way I calculate BVPS30. Finally, I discount BVPS30 back to the present. As my example of Zenith proves, I don’t see where I am mathematically double counting. But, if I am actually double counting, I hope you can show me… mathematically! Btw, in year 1: BV = $8,194.1 million Portfolio of investments = $25,461.6 6% of portfolio of investment = $1,527.7, which is 18.64% of BV… A return of 4.83% on their portfolio of investments is actually enough to increase BV by 15% in year 1. Gio

If PW thinks Zenith IV is 1.3 x BV0, with BV0 = BV today, and Zenith BV compounds at 15% annual, and the business prospects for Zenith don’t change, won’t PW still think that Zenith IV would be 1.3 x BV30, with BV30 = BV 30 years from now? Gio

That's exactly right. Double counting. Ok, now I have understood what you mean. But I am not trying to do what you suggest. Instead, I am only trying to compute the true value of what I own today. In doing so I don’t see why I should strip-out goodwill, if PW hasn’t paid more than IV. Then, I am trying to figure out the value of what I could be owning 30 years from now, if the value of what I own today compounds at 15% annual. Then, I discount it back to the present. That’s all I am doing. Where is the double counting? Gio

And don't you think PW works through economic goodwill diligently enough? Gio

Ok, thank you. If I haven't overpaid for a business, why should I strip-out the goodwill on my balance sheet to compute what I truly own? Gio

Sorry, Eric, clearly don’t want to annoy you! ;) I simply don’t understand why, if I haven’t overpaid for a business, I should strip-out the goodwill on my balance sheet to compute what I truly own. Gio

;D ;D Gio

Mmm… Ok, let’s say he pays IV… even though you teach me a value investor always looks for a discount to IV, right? Anyway, I don’t think he pays more than IV. And I would strip out intangibles and goodwill only if acquisitions wre made above IV. Gio

I guess you forgot management... Are you willing to pay to partner with a good entrepreneur? Gio

IV is partly reflected by the premium that FFH pays when it purchases wholly-owned insurance businesses. Why? I think PW buys wholly owned insurance companies only if he thinks he is paying less than IV, don’t you? Even when he is paying 1.3 x BV. Gio

This thread is about whether 1.15 x BVPS is FFH IV. If its IV is higher or lower than that. HFs don’t enjoy the benefit of float. Ask WB what he thinks about the value of float. Ask PW what he thinks about the value of float. Why is PW going on buying insurance companies all over the world if FFH is nothing but an HF?? Gio

I agree 100%. I guess probably in Europe we are still feeling a pain that in the US was only briefly experienced in 2009-2010… That’s why rising stock prices don’t make us feel so much comfortable… In Italy, and maybe also in England (at least in part!), we feel first-hand the irrationality of asset prices that go up almost every day with tons of qualified people that remain without a job… The piece of news industrial production in Italy declined again last July is just out, the biggest construction companies in Italy have all practically left the country, our debt is the third largest in the world… and yet the Italian government can borrow at a lower cost than the US! Isn’t this irrational enough? Believe me, if you live it each day, it surely is! Gio

Almost all developed economies are plagued by debts that keep rising instead of gradually decreasing. And debt beyond a certain level stifles economic activity, instead of stimulating it. Meanwhile central banks have flooded the world with cheap money, printing like it has never been done before. As a result all asset prices have gone way up. Poor economic activity, high asset prices… what other irrationality do you need?! Fairfax is right about being worried. It’s a $37 billion in assets insurance conglomerate… It must worry about high debts and high asset prices… We might have the luxury to disregard what’s happening around us… Certainly not Fairfax! Anyway, this sums up pretty well what I think: The Schiller PE of the S&P500 is around 26.5, either in the next 2 years it gets to 29 – 30, or it stops getting higher and higher. If the Schiller PE gets to 30, there is no doubt in my mind a bubble has finally developed. Otherwise, we will muddle through. In any case Fairfax’s conservative stance will be finally proven either right or wrong. Not much time left to wait. Gio

A premium to BV doesn’t mean you are paying a premium to IV: if you are paying more than BV, but less than IV, chances are your investment will turn out fine. The point is not really how much Buffett paid for his float (he is among the richest men on earth, isn’t he?!), the point is 1) how much does he think float is worth? 2) Does he think float in the hands of a bad leader is worth as much as float in the hands of a good one? 3) How much does he think underwriting profitability is worth? My answers: 1) A lot, 2) Not at all, 3) A lot, but much more as a sign of how safe insurance operations are, than for the amount of cash generated. Gio

I am not saying what you suggest. But I don’t think Buffett started investing in insurance companies because he liked an intensely competitive market… Buffett has said many times the insurance business is a difficult business… And he doesn’t like difficult businesses. He started investing in insurance companies because of the float and because he thought the securities business is a good business. If I remember well, those are the exact words he used in a letter from the days of his partnership: “the securities business is a good business”. And float is the stuff the securities business is made of. When you buy FFH, you are clearly not only paying for the securities on its balance sheet: instead, your are paying for all its balance sheet. You give $447.5 and you get more or less $1,200 in investments working for you. What’s the difference if Buffett pays for his float and then he uses it himself, or if I pay for my float and then ask Prem Watsa to take care of it? Of course, you might say Buffett didn’t pay more than BV for the insurance companies he bought… I don’t know how much he paid, cannot reply to that… Anyway, it is clear to me he thinks they are worth much more than BV. Gio

I guess "Wtf" means something not very polite... Anyway, the multiple over BV you should be willing to pay both for FFH and for BRK depends on the rate of BV growth they will achieve during the next 40 years (more or less). What do you think will grow faster: A) an $8 billion company led by a 63 self-made billionaire, who is still very motivated and planning for the very long term... With an equity portfolio hedged for the next 2 or 3 years; B) a $300 billion company led by a genius like Warren Buffett... For the next 10 years. If your answer is B, well then I think you might be right... Unpolite, but right... My answer is A! Gio Ajit Jain, Tad Montross, Tony Nicely et al have been running BRK's insurance biz for over 20 years. They have managed the CR, profitable float etc for that entire time. The next 10 or 30 years is likely no different. So, BRK's insurance business promise over the next 50 years has very little to do with WEB's age. Prem has not run a good insurance operation at all over the comparable timeframe. Yes, Odyssey has brought some insurance wherewithal to FFH and thus it is all conjecture at this point that ORH insurance prowess is readily scalable across FFH. I sold out of FFH waiting to see how they do as an insurance operator. Five years at least for me. The only real comparison between BRK and FFH is what would happen if there are two or 3 years of disasters, like KRW & Earthquakes & floods. The insurance clock will be reset then. The largest Insurers of today, State Farm, Allstate are said to be vulnerable. Will FFH be found with or without clothes when that tide goes out? Berkshire will do fine. Especially in the aftermath. What's the probability of this happening? It is non zero. It has happened in the last 100 years. It seems almost anybody tends to overlook the importance of a leader. In general there seems to be the idea that the larger the organization the less important the quality of its leader. I don’t agree. Most people need and even want to be led, either they find themselves in a small or in a large organization. And the quality of their work and their performances is deeply affected by how effectively they are led. I am not saying Berkshire will come to an end after Buffett is gone… After all, the roman empire didn’t come to an end after emperor Nero succeeded emperor Claudius, right?… Of course, results weren’t very satisfactory either…!! ;) Seriously: Berkshire might go on growing like it is doing today after Buffett is gone, but it is not something I want to bet on. Gio

FFH has a long history of not overpaying for assets. Therefore, I don’t see why goodwill and intangibles should be an issue. Of course, if you strip out goodwill and intangibles by default, that’s a different story… But I don’t think they should. On the contrary, investments in associates were recorded at $1.85 billion, while their market value at the end of Q2 2014 was $440 million higher. $440 million is another 5.37% of shareholders equity. Btw, Eric, do you know of any pension fund which increased its equity 17% during the first 6 months of 2014? … Hard to think FFH holds the same investments of the average pension fund! ;) Gio