giofranchi

I think one of the most difficult thing for the market to do, and therefore one of the areas where the largest discrepancies between prices and values can be found, is to assess correctly a business which will compound capital for many years into the future. And that is so difficult for the market to do, because it is the job of the entrepreneur… while only a very tiny percentage of market participants are entrepreneurs. Therefore, yes! I guess price can lag iv for many many years… Until that business finally ceases to be a compounding machine (if BRK risks that fate, nothing really lasts forever! ;)). This, of course, doesn’t mean you cannot make a lot of money: if iv is 2xbv, and a business sells for 1.5xbv 10 years in a row, but increases bv at 15% annual, your capital in that business grows 4 times, even if the business in year 10 is still undervalued… Gio

Of course it would! But MKL might grow 10 folds and still be much smaller than BRK… Gio

Ah! Ok! Now I feel stupid... :-[ Gio

The reason why BVPS at BH has not shined until recently has nothing to do with size… Of course, how could it?! BH is still a very small company with huge room for growth! The reason instead is that you cannot grow BVPS at high CAGRs when all your assets are in a relatively low return business (unless you make use of a lot of leverage!)… In fact, at the beginning investments were almost negligible… now that investments have grown large enough, BVPS in the last 2 years has increased 20%+: BVPS growth at BH actually has accelerated! And I think it will keep increasing very fast for a very long time! MKL, of course, is already much larger than BH… But imo is not TOO large to keep compounding at high rates. Gio

Well, if you go back 20 years the CAGR in BVPS is 15% (see page 2 of 2013AL). In many years the 5-year CAGR in BVPS has exeeded 20%... As reacently as 2007 it was 18%... The whole letter is a fantastic read imo! Find it in attachment! ;) Gio MKL2013AL.pdf

What do you mean exactly? 5-year CAGR in BVPS, for instance, is 17%... Gio

--Charles Munger, 2014-05-05, on CNBC's "Squawk Box" Gio

Well, all I can say is I look for outstanding entrepreneurs, like Mr. Watsa, at the helm of predictable businesses, like FFH (insurance imo is a predictable enough business, meaning that I don’t see it subject to any sort of disruptive change in the foreseeable future). But… I would be glad if I am right about the man and about the business 5 times out of 10! Therefore, I invest my firm’s assets in 5 to 10 companies, and almost never exceed a 30% position. ;) Cheers and thank you very much for your first post! Gio

The Problem With Piketty by Mr. Charles Gave Gio The_Problem_With_Piketty.pdf

Yes, it does! But the First National Bank was not the "average" bank of its time... Its balance sheet has always been rock solid, and I wouldn't be surprise to find out it was much less levered than the "average" bank's. ;) Gio

Dazel, Any hint where you are redeploying the proceeds? Some new great ideas? ;) Thank you, Gio

Gary, certainly I have invested in BRK. But I have no position now. Among my “qualitative” criteria are: - A owner/manager who can be at the helm for the next 15-20 years: the only owner/manager who probably doesn’t satisfy this criteria in my firm’s portfolio right now is Mr. John Malone… who nonetheless is 10 years younger than Mr. Buffett. - A business that is still relatively small: the only business that probably doesn’t satisfy this criteria in my firm’s portfolio right now is VRX… which nonetheless is much smaller than BRK. I know Mr. Buffett is a genius. I just have an hard time believing that an 83 years old man can grow at high rates a $315 billion company for many years into the future… Gio

Just to be even clearer: Only because I am willing to pay more than you for what I like, doesn’t mean I don’t put great emphasis on valuation. Who cares? I never ask if someone is replaceable or not… I don’t care! I only look for what I like. Is it there? Is it not? That’s all I am interested in. If I find what I like, I invest. Otherwise, I pass. Never said I am outstanding… Probably, I am average at best… And my results will therefore be average. But I will always do only the things I understand and judge reasonable and rational. Cheers, Gio

Tom, First of all I was not saying you didn’t read every post of mine with carefulness… I was only referring to my last post you commented in this thread! Well, you said I was just quoting other successful entrepreneurs, while instead I obviously start from my daily experience, and only look for confirmation in the experiences of other people more successful than me! That’s what I do. And I think it was very clearly expressed in my post… This is the reason why I thought you read that last post of mine not very carefully… That’s all! :) Second: many many many companies simply survive… Top management is at the top because they have a flawless track record?!?! You truly believe that?! That’s not my experience at all!! I know, as you say, that a lot of people on this board have connections with a lot of entrepreneurs… but I have to ask: do YOU work on a daily basis with entrepreneurs? Because so many of the things you say make me wonder how two business experiences like yours and mine can be so much different! :o My experience is that a lot, way too much!, of top management is arrogant, overbearing, and too self conscious to be truly reliable, and got where they are basically through personal or political connections. Others have merits: for instance, they were very good technicians, or very good sales people… but unfortunately lack those requisites as strategic thinkers and in allocation of capital that are necessary in a CEO to make almost any company truly successful… Result: I know a lot of top managers for whom I have very low esteem… Maybe, where you live things are different… ??? Third: you say that what I look for is vague? I would say “qualitative”… but the characteristics I look for in a manager are very clear (at least to me!)… far from vague! Fourth: I am only saying that what I do in investing is driven by my experience in business… I have never said it is the way to go!! Believe me, I have read many books on those psychological stuff you very often point me to… It is not really true I am unwilling to consider counterarguments… Actually, I am here on the board exactly because I want to hear the reasonings of people who disagree with me! ;) Those counterarguments, though, must be extremely strong to somehow convince me… Because it is extremely difficult for me to wear a hat while managing my business, and to change it while investing its fcf… You might understand that to manage two different ways of doing things is much more difficult and time consuming than to manage only one! Even if I am open to admit that two ways might be better than one. But the question is: how much better? Does the reward truly justify the effort? Gio

Will The Last Businessman To Leave France Turn Out The Lights? by Mr. Charles Gave Gio Daily+5.7.14.pdf

I don’t believe in “fixed capabilities”. I think we can improve and get better. And I want to partner with people who constantly strive to improve and get better. Imo FFH is showing precisely that attitude with its insurance and reinsurance operations: barely a couple of years ago they seemed doomed to always underperform, instead now they have improved their underwriting remarkably, to the point they are even making a profit out of it! And I believe Mr. Barnard won’t behave complacently going forward, instead he will keep pushing to make things better and better. The same applies to their investment capabilities: imo those capabilities have always been very good, but nonetheless I think they will keep improving. How? Well, FFH will focus more on acquiring whole businesses and on searching for quality. Their recent moves already show this tendency, and it will become ever more pronounced. Math imo doesn’t lie: with a small underwriting profit, they must average a return around 6% in their portfolio of investments to compound capital at 15% annual. In the past they have averaged 8.9%. That's my idea of margin of safety! ;) T-bone1, I will try to answer your question: Mr. Prem Watsa. For the next 20 years he will have the last word on any decision about capital and resources allocation that really counts. This doesn’t mean he won’t listen carefully to every suggestion coming from the many talented people he surrounded himself with. :) Gio

Those costs flowed directly to BV. No artificial inflation of BV there! Gio

What do you mean? He paid less than BV for those acquisitions, therefore no goodwill was recorded… Gio Prem should have paid even less than what he did for TIG and C&F. But, hindsight is 20/20. Maybe… But we were talking about how goodwill might sometimes inflate BV. Those two were clearly not the cases. ;) Gio

Btw, Tom, I have never said it would be easy… Far from me! Yet, I know exactly which kind of people I like to partner with, and I constantly look for them. Those people are a necessary prerequisite to develop conviction in (almost… ok, with the exception of KO and JNJ!! ;)) any organization! Sorry to say this, but doing business is not like sitting at your desk and reading thousands of pages of 10-Ks and 10-Qs… I have witnessed businesses with hundreds of million in sales brought down by a couple of very stupid decisions… The fact it is not easy to find people who are truly worthy of our trust and respect, doesn’t mean we can do business without them… Look, it is really as simple as this: If you want to own a business for the value it is going to create in the future, you MUST absolutely have confidence in the people you are partnering with. Instead, if you buy a stock, because it is too cheap no matter what management does, then you better get out as soon as you have the chance to take that last puff! (In this case I would advise a very diversified portfolio a la Kraven!) As far as FFH is concerned, Mr. Watsa is 20 years younger than Mr. Buffett and still runs a much smaller organization than BRK. He undoubtedly is the kind of person I like to partner with, and he can grow FFH at 15% for many years to come. But, the fact I like what I see doesn’t mean he will surely achieve that goal! This we all agree with and imo is self-evident! My conviction in FFH is not driven by the fact that, if Mr. Watsa makes the right choices, it will compound capital at 15%… My conviction in FFH, instead, is driven by the fact that, even if Mr. Watsa might make some bad moves, it will turn out to be a solid investment. When you partner with those people, it is always the downside you get protected, and for a long time! When you know you have taken care of the downside, you can develop conviction. Gio

What do you mean? He paid less than BV for those acquisitions, therefore no goodwill was recorded… Gio

If BVPS multiplied by the number of shares a shareholder owns represents his/her true capital (goodwill may detract only if FFH paid too much for an acquisition… and I don’t see Mr. Watsa paying too much…), and that capital grows faster than FFH’s cost of capital, which is the discount rate you should use to calculate its present value of equity per share or IVPS (please, refer to “Accounting for Value” by prof. Stephen Penman), then it is a mathematical reality that IVPS is higher than BVPS. Period. This has nothing to do with the question: is BVPS equal to IVPS? Of course, why should you own ANY business that gives you X %, when you could trade and gain X+Y %??? Gio

Gary, The cost of capital for FFH imo is: Cost of equity: I would say that is the opportunity cost Mr. Buffett talked about, and I would grab 2013 BRK AR, page 4, look at the compounded annual gain 1965-2013 for the S&P500 and get that number. + Cost of float: I would grab FFH 2014 AM presentation and look at page 18. + Cost of debt: I would look at how much FFH pays on its long-term debt. Total capital is Equity + Float + Debt, and its cost should be calculated proportionally. It clearly is lower than the opportunity cost Mr. Buffett talked about. Therefore, I use 9% for FFH (conservatively enough!). Gio

Tom, please read what I write with carefulness, before you quote and answer my post… Read very well line number 3 of my post and think it over a little bit… I am not only quoting… I am giving you my daily experience… working with many entrepreneurs, engaged in many different endeavors! Then, of course, I am also pleased by the fact that, studying the methods of the best entrepreneurs present and past, I find proof of what I experience every day. ;) You think Mr. Watsa didn’t live up to the test? Well, then put him among those 4 or 5 out of 10 that under delivered! Imo it simply makes no sense at all! Gio

Al, of course you might be right. I don’t play that game, but you might be right! ;) Gio

Al, It is a mathematical reality the fact anything that grows BV at a higher rate than its cost of capital has IV higher than BV. Gio