giofranchi

Hi David! That’s a great quote indeed! Because you truly never know when you’ve reached the top. Yet, I wonder… is it actually a matter of “sell or hold”? Isn’t “sell or hold” too much… “black or white”? Instead, I like shades of many colors… I like to watch other people’s behavior and to adjust my own behavior accordingly. Why do I think that general market prices are important? Exactly because they represent the best mean we possess to judge other people’s behavior: when they are reasonably low, the participant in the market are most probably behaving with prudence; instead, when they become very high, the participant in the market are most probably behaving with arrogance and recklessness. You might never know when the top is coming, but I believe you should study other people’s behavior and act accordingly. When they seem to be behaving with arrogance and recklessness, you might bet something troublesome is brewing somewhere, even if you don’t see it, until it finally happens. That’s why I am a great advocate of constantly letting your “cash reserve” expand or contract gradually, in accordance (or should I say discordance?) with other people’s behavior. The notion of letting your “cash reserve” expand or contract gradually is something I much prefer to the “sell or hold” diatribe. Gio

In 1936 Mr. Keynes had net assets worth £506,522 and loans worth £299,347. Therefore, his debt / equity ratio was 0.6. It doesn't seem too levered at all... Besides, from 1937 until 1949 the Shiller P/E of the S&P500 contracted from 22.2 to 9.1... Of course, I cannot speak for Mr. Buffett, but I guess even him would have found difficult to navigate such turbolent waters... 2008 in comparison has been a walk in the park... Imagine 12 years of markets going down, instead of just 1! Imo nobody would be spared. So, let's just hope it won't ever happen again! ;) Gio

I also have a copy of "The Collected Writings of John Maynard Keynes: Volume XII: Economic Articles and Correspondence; Investment and Editorial". And I would recommend it. :) Gio

I agree. It is a great book. :) Gio

Thank you guys! Always funny, helpful and very kind! I appreciate it so much. :) Cheers, Gio

Hi guys… This is really hard to admit… But there is no point in hiding it… I have just been officially dumped… Therefore, I will come to Toronto alone. And, Sanjeev, you can give away the second ticket I had bought to whoever you’d like. I know with such a failure I must be leaving Kraven seriously down… But perhaps part of the fault is also yours… After all, you had given me a lot of PUAs’ tricks and routines… but no strategies to manage a relationship!! ;) Jokes aside, it is not a good day for me… Gio PS Until a few days ago I was thinking: “Ok, I am bad as an investor, but I must be a good lover indeed! Just look at my girlfriend!” … Now, it is a true race: am I worse as an investor, or as a lover??!! ;D ;D

Well, we have almost never got single investment discussion by Mr. Marks before. And there is no reason to expect him doing so in the future either! If that is what you meant. As far as I am concerned, I always like to hear where he thinks the pendulum is standing at each point in time. That’s basically why I continue to listen to him and to pay attention to what he has to say with interest. :) Gio

Mr. Charles Gave on "How To Think About Deflation" Gio Daily+2.27.14.pdf

Euro-Zone Inflation Falls At Record Speed http://www.marketwatch.com/story/euro-zone-inflation-falls-at-record-speed-2014-02-24?link=MW_home_latest_news Gio

You want to take a look at what happened to FFH in 2008. I love the company and management, but as they are currently positioned, I find it hard to justify owning the stock. If the market goes down, FFH will certainly go down in the short term. If the market goes up, FFH will decline in value. I would rather own cash that is earmarked for FFH and buy it once the market declines . . . if the market doesn't decline, I would rather hold cash than FFH. Of course, this makes no sense to me. What I see follows: In a market correction FFH's equity hedges will appreciate faster than its equity investments will decline, interests rate will come down because people will flee towards the safety of government bonds, and insurance operations might still be profitable. Therefore, FFH will make money on its equities portfolio, on its bonds portfolio, and on its insurance operations. FFH’s BVPS after a market correction will be much higher than before. Gio

When you look at the history of us debt levels you would see that current levels are not that high. Around 1945 we had a similar situation when you only look at the numbers and the next 20-25 years were very good for stocks. So its possible that you have to wait a long time until that situation is gone. And the crux is that as the debt levels hit a low of 20% of GDP the stock market crashed in 1973. http://www.multpl.com/u-s-federal-debt-percent/ Thats probably because fresh money is not flowing into bonds when interest rates are low, its going to stocks. frommi, the first picture in attachment clearly shows 2 things: 1) Total US debt today is still extremely high; 2) The last time it was very high (still lower than it is today), it was in the mid-30s’ and a process of deleveraging went on until the early 50s’. Furthermore, we all know that stocks bottomed in 1949, almost exactly when the process of deleveraging came to an end. No wonder for the next 19 years stocks had a wonderful run! (see picture n.2 in attachment) In 1949 the US had the exact opposite combination we have today: that’s to say, low debts + low valuations. This being said, Mr. Shilling thinks that during the next 4 to 5 years the process of deleveraging we are living today will finally be over. I wouldn’t be too surprised if 2019 will turn out to be 1949 all over again! ;) Gio US_Private_and_Public_Debt_as_a_%_of_GDP.bmp

I am never upset! A bit lonely… maybe! But never upset! ;D ;D Cheers, Gio

I don’t really think they are market timers… As you have also pointed out, and rightly so, FFH probably had never used equity hedges until 2002-2003… And of course I cannot know, but I guess they will not go on using them forever… Instead, I think both Mr. Martin and Mr. Klarman and Mr. Watsa, who I am sure would define themselves as “value investors” not “market timers”, at the beginning of the new millennium got scared by the combination of historically very high debts and very high asset prices. Throughout history very high debts alone or very high asset prices alone have usually caused a decent amount of trouble… but the combination of the two have many times wreaked true havoc! That’s why imo we have gone through a 10 years period in which value investors simply behaved much more conservatively than they usually would do and did in the past. Let me be clear about this point: it is not that the concept of insurance is completely foreign to a value investor… Mr. Klarman in “Margin of Safety” asks the following question: person A compounds capital at 20% for 9 years, then loses 15% in year 10; person B compounds capital at 16% for 10 years; who has the largest capital in the end? You already know the answer, without the need to calculate. Therefore, the idea of forgoing some gains, to purchase safety in the form of insurance, is in the DNA of the value investor, who is more concerned about protecting capital than increasing it. What really changed during the last 10 years was the amount of cautiousness those value mangers believed was necessary to employ. And the reason, I believe, was that combination of historically very high debts and very high asset prices I have just referred to. The moment that combination is gone, they most probably will be back to business as usual! Gio

One thing I don’t understand is your comments about Mr. Martin’s returns… For what I see, if I had invested with Mr. Martin since inception of his firm, today I would be worth 25% more than if I had invested in the S&P500… Moreover, this outperformance was accomplished in such a way that today I would hold a ton of liquidity to take advantage of future opportunities… I simply don’t understand what’s not to like about that! Which would you prefer? 1) to be worth 25% more and have 73% of assets in cash today, or 2) to be worth 25% less and be fully invested today. Even Packer, arguably the most bullish poster on the board, recently is admitting that he is looking for opportunities outside the US to find value today… And I take that opinion, from such an astute and smart stock picker as we all know Packer certainly is, as the definitive evidence that today I would rather have a lot of cash than be fully invested. Whoever looks at this pattern: 2003 87.2% of outperformance when stocks are fairly valued, 2007 42.7% of outperformance when stocks are overvalued, 2008 110.7% of outperformance when stocks are fairly valued again, 2013 25.1% of outperformance when stocks are overvalued again; should ask himself what the % of outperformance will probably be, when stocks become fairly valued once again. I guess it will be significant enough! This being said, I am only defending something that I think is unjustly disparaged… But certainly I am not comparing Mr. Martin’s long-term returns to those achieved by the likes of Packer, Eric, Kraven, etc.. If you know how to invest like them, Mr. Martin’s defensiveness today cannot but look foolish to you! Gio

This is the way Warren Buffett commented “Speculative Contagion”: If Warren Buffett enjoys reading Mr. Martin’s letters, I thought the latest letter of his would be an interesting read for this community too… Evidently, I was mistaken…!! ::) Gio

--Seth Klarman --Charles Kindleberger Gio MCM_2013_Annual_Report.pdf

Buffett's punch card approach to emoticons? (This way your post can have a Buffett reference, as is your wont) You caught me. It is my wont. Why? I think the difficulty of expressing feelings and emotions through posts and e-mails is very well known and documented… And personally I find emoticons useful… Better to add an emoticon, than to risk others would misunderstand your true meaning… No? Therefore, imo the ones among us who don’t write like Victor Hugo used to, should not be shy or ashamed of inserting an emoticon once in a while! ;) ;) ;) ;) ;) Gio

An artiste and a gentleman and a scholar… but no entrepreneur… ah!! That’s a pity… But at the same time it is also very funny! I know what you mean, and I know you are simply great at what you do. As for me, I find very hard to recognize the difference between price and value of things I don’t think I know well. I simply lose faith in my judgment too easily… ::) Gio

Ah! Eric, that’s exactly why rates won’t go nowhere for yet some time! If there is one thing the US should want to manipulate, even more than the stock market, is the interest they pay on their staggering debt! ;) Gio

Either art or diet coke, first and foremost I need to KNOW what I am investing in. And in my experience to know a business well is quite difficult; on the contrary, to suffer the illusion of knowing a business well is quite easy. Not to fall prey of the illusion of knowing a business well, I let my circle of competence grow very slowly over time. Even so doing, I believe there are inside my circle of competence some businesses I don’t know as well as I think. Among the few businesses I think I know well, none are cheap right now (with the possible exception of the ones I already own a lot of). Gio

And Mr. Bradstreet’s, and Mr. Barnard’s (even if insurance is “just” the lever… ;) ). Gio

I have just purchased the book. Thank you for recommending it! ;) Gio

Well, of course my “7 lean years + 3 boom years” was only meant to give you an idea of the timeframe I am using for judging FFH’s results. If 7 lean years won’t be followed by very good results, then I will judge FFH’s strategy a bad one. I have no idea what the future holds… but why are you assuming that rising rates would accompany a market correction? The opposite imo might be even more plausible. Is this totally unthinkable? A stock market correction, with interests rates that go down as people fly to the safety of government bonds. FFH’s equity hedges rise more than its stocks portfolio declines, its bonds portfolio appreciates, and they keep underwriting profitably. That would surely lead to “boom” results! And it is far from unthinkable. It is simply too early yet, to dismiss such a scenario! ;) Gio

I agree. That’s why I have said that imo to have a cash reserve, and to make it grow or shrink strategically over time, and to hedge equity exposure are two very different things. Even accounting for exceptional mark to market bond losses in 2013 and a 30% cash position, without the losses due to equity hedges FFH would have posted very satisfactory results! Gio This being said (equity hedges have undeniably been a costly mistake!), what to do now? Mr. Soros seems to agree with FFH's strategy of keeping equity hedges in place: Soros doubles a bearish bet on the S&P 500, to the tune of $1.3 billion http://blogs.marketwatch.com/thetell/2014/02/17/soros-doubles-a-bearish-bet-on-the-sp-500-to-the-tune-of-1-3-billion/?mod=MW_home_latest_news Gio

I agree. That’s why I have said that imo to have a cash reserve, and to make it grow or shrink strategically over time, and to hedge equity exposure are two very different things. Even accounting for exceptional mark to market bond losses in 2013 and a 30% cash position, without the losses due to equity hedges FFH would have posted very satisfactory results! Gio