giofranchi

The Euthanasia Of Pensioners In Peoria by Charles Gave Gio Daily+3.28.14.pdf

This is one of the reasons why I deem the possession of a cash flow machine to be so much important in business: it is the best remedy I know of against “anxiety”. ;) Gio

+1 Thanks for posting, Nnejad! :) Gio

I need to see what I call “an entrepreneurial force” before investing. And I don’t see such a thing at the head of any mega bank around the world. Therefore, I missed the bank stocks rally. I don’t mind. Just like Mr. Buffett doesn’t mind having missed Apple or Google. Instead, I focused on improving the performance of my operating businesses, and juicing their results a bit with some stock market returns. It has worked quite well until now. And I think it is a strategy that will lead to further gains in my firm’s BV, at least until stock market prices become reasonable again. :) Gio

You know what they say: “a recession doesn’t destroy capital, it merely reveals the extent to which it had already been destroyed during the previous boom years”… or something like that… I think Mr. Watsa in 2000 started to get worried about both the level of indebtedness and the level of the stock market in developed economies. And I think he knew the process to decrease both indebtedness and stock market prices is a slow and tortuous one. A process that would probably take the best part of two decades! And he decided he would heavily expose FFH to the stock market only in those instances when stock market prices were at or below intrinsic value: 2003 and 2009. The rest of the time he decided to stay hedged. Therefore, no, he certainly wasn’t worried about how people were behaving in 2011… He still was worried about how people behaved in the ‘80s and the ‘90s, and how they behaved from 2003 to 2007. I guess he is worried now about how people have behaved in 2012 and 2013… It is really a two decades picture… And I guess you simply cannot judge it referring to any given year. This being said, I also would have liked that his caution about debt levels and the stock market level would have translated into more action in purchasing whole high quality businesses a la Mr. Buffett… Actually, they have been very opportunistic in buying insurance companies around the world, companies that imo will prove to be great platforms for future growth! Yet, there is no point in denying the fact they might have been much more aggressive (like Al has often said!). I think it simply is not in their DNA yet… But they are working on it… And I think they will get there sooner or later (let’s hope sooner rather than later). In the meantime they have worked hard on improving their underwriting performance, something that imo will lead to interesting financial results in the not too distant future. ;) Gio

The point you mentioned above, is really the key difference between bulls and bears at this time. Almost all who are bearish at this time, Klarman, Rodriguez, Watsa, Hussman, Grant, Grantham, etc bring some version of morality/justice into their equation. For all of them it boils down to justice not being done, for the sinners (who participated in the bubble) got bailed out, the profilgate debtors who got their burden reduced by low interest rates, the prudent savers who are getting punished, the unemployed who did not benefit from fed policies while the rich investors who have stock holdings have gained massively. It does not seem fair. Watsa codes it as "7 lean years and 7 fat years", others are more direct but morality is a common ground for all these investors. Hussman in particular seems to have expected some version of great depression to play out and was caught by surprise when the historical script did not play out. I did incline towards moralists for a long time, but I am coming to the conclusion that while Market serves lots of purposes, enforcing morality is not one of them. It is interesting that the most hyper rational investor of all, Buffett, does not ever mention any of these. Vinod Vinod, Among the list of bears you forgot to mention Mr. Soros… If we are talking about market timing, Mr. Soros’ point of view is not one you want to dismiss…!! Besides, even Mr. Buffett has allocated 76% of BRK’s assets in ways that are much insulated from what the stock market will do in the future… I think I have shown this in the LRE thread. Like they say: pay attention to what they are doing, not to what they are saying! ;) Morality/justice have nothing to do with this. Prices are information. When prices get too much distorted and out of whack with values, people get false information. When people get false information, they do dumb things. When people do dumb things, few other people, those who are great judgers of values, get worried. Imo there is nothing wrong about getting worried. It all depends on how you decide to act on your worries: Mr. Buffett, for instance, decides to concentrate on building earning power for BRK, instead of investing in the stock market; Mr. Klarman decides to give back capital to his investors; Mr. Watsa decides to hedge 100% FFH’s exposure to the stock market… Given the results of the last three years, I might agree with you Mr. Buffett and Mr. Klarman chose the wisest courses of action. ;) Gio

--A Memorial of John Pierpont Morgan, Sr. Gio

That is an excellent read - thanks for posting. I agree: a good read. Though, I would say the author focused very much on what went wrong in the last 3 years, and not nearly as much on what went right... Of course, what went right has yet to produce gains and significant financial results, which imo will materialize in the future. Therefore what went wrong I think is much easier to see than what went right. Gio

;D ;D My pleasure! Gio

-Nobel laureate, and behavioral investing pioneer, Daniel Kahneman 50 REASONS WE’RE LIVING THROUGH THE GREATEST PERIOD IN WORLD HISTORY Gio EVA+3.21..2014_NA.pdf

Gio

I take this as the best compliment I have received in years!! It is really flattering!! ;D Thank you very much! ;) Gio

I will answer this one! ;D Today FFH’s equity is $7.2 billion. If it compounds at 15% for the next 10 years, its equity will become $28.8 billion. If it compounds at 15% for the next 20 years, its equity will become $115.2 billion. At that point, if it sells for 1.4 x BV, its capitalization will be 1.4 x 115.2 = $161.3 billion. Little more than half what BRK is selling for today. Besides, at that time I guess there will be many trillion dollar companies (markets will be much larger)… Therefore, no, I don’t think size will be a serious obstacle to compound at 15% annual going forward. :) Gio

Another example of the power to have a substantial "cash reserve" in times of trouble. Don’t ask me how those people managed to achieve that. Just be aware that they did. ;) Gio

Kraven, I also don’t like these kinds of threads… If you want to speak about FFH, well then speak about the company! Instead, very few people do so. But, to be clear, imo “macro” has nothing to do with “general market valuation”. I don’t care much about macro (I wouldn’t have invested in ALS otherwise!), yet I am worried about general market prices. General market valuation applied to the S&P500 is no different than trying to value a portfolio of 500 companies. Not easy, of course! ... I guess 500 companies are a lot even for you! But the idea is the same: to compare prices with values. The "headlines" Mr. Buffett speaks about are totally different things. The short-cuts often used to value a market, and that have a long-term track record of reliability, might be somehow questionable… in the end, though, they are nothing but simple means to avoid much trouble and work: that is to value 500 companies, one by one! And you know what? I guess that, if you’d make the effort to study and value each of those 500 companies, you would come to the conclusion that portfolio of 500 companies is not of your liking at all! ;) Gio

frommi, I don’t share your concerns about FFH, and here is why: Bonds: FFH bonds portfolio was mainly assembled in 2008-2009 and, like Mr. Watsa has often reminded us: That was at the end of 2012. Today those bonds are certainly much more attractive! I am not saying they are as attractive as they were in 2009, but they are probably yielding around 6%. Not bad! Especially with the leverage FFH is able to use. Unless those bonds default, and most of them are insured by Berkshire, mark to market losses are not all that relevant, and there will be sure and substantial gains. Equities: Why is everyone assuming that FFH’s portfolio will go on underperforming the indices?!?! Just because it has done so last year?! FFH’s equity investments have a long history of outperforming the indices, and they will probably outperform again in the future. What I do see: An outstanding organization that through the opportunistic purchase of insurance companies all over the world is becoming more and more global. So many opportunities for growth. I am exited to see what they will be able to accomplish during the next 15 years. Gio

Profits from equity and equity related investments in 2013 were $1,445 million, while Preferred stocks + Common stocks + Investments in associates at December 31 2012 were valued at $6,359. That’s a return of 1,445 / 6,359 = 22.7% (dividends excluded and BB included ;) ). Given the fact that $1,324 million were realized gains, the annualized return might be significantly higher, depending on when those securities have been sold. :) Gio From the annual letter, he says: In 2013, we had a total investment return of negative 4.9% (versus an average of positive 4.4% over the past five years and positive 8.9% over our 28-year history) mainly because of our 100% hedge of our common stock portfolio. If we had not hedged, our total investment return in 2013 would have been a positive 3.6%. In our 28-year history, we have had negative total investment returns in only three years: 1990 – (4.4)%; 1999 – (2.7)%; and 2013 – (4.9)%. In the past, these returns reversed the following year, as shown in the table in the MD&A! As we said earlier, as of February 28, 2014, we had an unrealized mark to market gain in our investment portfolio of more than $1 billion – after tax, this would have eliminated our net loss in 2013. Yes, that is total investment return. Of which the return from its equity portfolio is only a part. But total investment return suffered from $995 million unrealized bond losses... What's so hard to fathom? Practically every bonds portfolio suffered mark to market losses in 2013. Gio

Profits from equity and equity related investments in 2013 were $1,445 million, while Preferred stocks + Common stocks + Investments in associates at December 31 2012 were valued at $6,359. That’s a return of 1,445 / 6,359 = 22.7% (dividends excluded and BB included ;) ). Given the fact that $1,324 million were realized gains, the annualized return might be significantly higher, depending on when those securities have been sold. :) Gio

Ok guys, the equity hedges have been a big mistake… Sincerely, I couldn’t care less now. Whoever reads this letter and doesn’t see the entrepreneurial global force FFH is becoming, simply lacks entrepreneurial spirit. It is so self-evident! 1) The best way to play the emerging markets story: FFH. 2) The best way to play an European recovery: FFH. 3) Even in North America, despite the headwind of high general market prices, FFH will go on purchasing whole businesses. People have been fixating on these equity hedges and are completely missing the whole FFH story. Nothing else to say. Gio

Well… maybe! Anyway, the question remains the same: when will FFH invest aggressively in stocks again? And my answer is: when they will see that those metrics, which compare PRICES to VALUES for the general market (be it the Dow, the S&P, or the Russell), at least stabilize. As long as they keep getting higher and higher, like they are still doing, I don’t think we will see FFH’s equity portfolio become larger. Gio

Yes! And that’s why the “average” stock is even more expensive today than it was in 2000… Wow! Maybe you don’t think the S&P500 is overvalued today… Yet, its Shiller P/E has to at least stabilize… If it keeps getting higher and higher… I hope you agree with me that sooner or later we will reach the overvaluation threshold. ;) Gio

No, they are shorting the Russell2000. Gio

ok. but this tends to happen every 30 or 40 years. And it just happened 5 years ago. So is that a wise bet? I see a two tiered market. I see massive overvaluation in a growing number of "hope and change" type companies. And I see reasonable valuation in many good companies like msft apple qcom, etc. Well, they think this happens anytime the disconnect between PRICES and VALUES becomes too large… It happened in 2000, it happened again in 2008… Twice in less than 10 years. Gio

--Page 11 That's precisely what I have been saying for some time. ;) Gio

Packer, As they keep selling stocks, also their equity hedges keep declining… So, what you are suggesting is in fact automatically happening! The problem is: when to aggressively invest in equities again? Here macro imo has very little to do… You might agree with how the Shiller P/E is calculated, or you might disagree… It doesn’t really matter: as long as it keeps getting higher and higher, the disconnect between PRICES and VALUES will get larger and larger. If they think it is already too large, they will need to see a contraction in that metric (or other metrics, like P/S, Market Cap/GDP, the Q Ratio), to move again into equities aggressively. Please note that the larger the capital you manage becomes the more you are affected by “the tide”, or by what the general market does. I don’t know how your portfolio would behave, if the general market were to correct heavily… Maybe, it would keep increasing in value nonetheless… But you know very well your portfolio is not FFH’s: they need to invest in relatively large companies to move the needle, and large companies which are deeply undervalued today are very hard to find. And large companies that in a serious market correction would behave uncorrelated to the general market are even harder to find. Gio