giofranchi

Yes! Of course! Never pretended to be such a good investor, and I think that probably I will never be! ;) Gio

Yes! Of course! But I think a goal helps you to keep things in perspective, and I find that to know what you are trying to build is very useful. By the way, I started my company with 25.000,00 Euros in capital at the end of 2004. Today its equity is worth 1.672.000,00 Euros… You calculate the compound rate! ;D ;D ;D Gio

Well, I guess it is just plain common sense. Warren Buffett has a track record of 19.7% compounded annual for the last 47 years. If you also consider the 10 years of his partnership, when he compounded at 31.6% annual, his track record might be closer to 25% compounded annual, more or less. And if he achieved 25% annual on average, I will be more than pleased to compound at 15%! :) Gio

My firm’s equity is up 23% this year. And I am very happy! ;D ;D My goal is to compound it at 15% yearly for the next 45 years. I will then have created a billion dollar company from scratch. You might think it is not such a worthwhile endeavour, but it is all I really look for from a professional point of view. So, 8 percentage points more than my annual goal cannot make me but happy! Although, my asset allocation really makes me look like a fool… 50% in between FFH and LRE, which practically went nowhere in 2013. Another 28% in cash + a basket of shorts, which cost me money in 2013. I also lost 4.5 percentage points due to USD/EUR exchange rate… Difficult to imagine how I could have been more “wrong” than in 2013… And I am up 23%. I repeat, I am very happy. The less I feel the net worth of my firm depends on what the market does, the happier I am. A prosperous 2014 to everyone! :) Gio

At 2009 year end FFH had an equity worth $7,619 million, with common stocks, investments in equity, and preferred stocks worth $5,621.3 million, or 73.8% of equity. Did they stretch their investment into equities to the upper limit? I cannot say… Gio

Al, of course I already knew what your answer would be. And you might be right. But please consider: 1) You don’t want to compare returns in the midst of a spectacular secular bull, with returns in the midst of a secular bear. 2) Sincerely, I think OdysseyRe is among the best underwriters today. 3) Mr. Watsa + Mr. Barnard don’t have really to be as good as Mr. Buffett + Mr. Jain, otherwise we would be expecting 20%-25% returns, instead of 15%. 4) With all due respect for BRK and all Mr. Buffett has accomplished, in 1993 they certainly weren’t what they are today: net operating earnings were $477.7 million, of which $321.3 were Net Investment Income and $20.1 million came from underwriting. Operating businesses earned: Dexter $28.8 million, Commercial & Consumer Finance $14.1 million, Fechheimer $6.9 million, Kirby $25 million, Nebraska Forniture Mart $10.4 million, Scott Fetzer $23.8 million, See’s $24.4 million, World Book $13.5 million. BVPS increased 14.3% and BRK’s net worth increased by $1.5 billion, which means that stock investments (increase in value + sales) contributed more or less $1 billion… It is clear to me that in 1993 BRK still counted on insurance and investing for most of its increase in net worth. 5) Please, also note that as good as those other operating businesses truly were, they almost count for nothing in today’s BRK. Listen, what I see in FFH is at least two bright and trustworthy people at the helm of a vehicle that could eventually follow in the footsteps of BRK. They have the brains and they have the right mean to achieve such a goal… This being said, I am certainly not saying they will succeed! Nobody of course can be sure about it. Gio

Of course, if we don't know the exact percentage, it is not possible to make a comparison with an equity fund. Yet, look at BRK's balance sheet: FFH might come to resemble something like that in the future. An equity fund simply cannot. I see much more room for growth in FFH than in any fund. Gio

So, which percentage of equity could they invest in stocks? And what about wholly owned businesses? Gio

What I mean is they are in insurance for the same reason the couple Mr. Buffett + Mr. Jain is in insurance. Anyway, I think they can have a portfolio of investments in equities worth as much as their equity, cannot they? Therefore, provided they know what they are doing writing insurance contracts, and don't accept undue risks, it is clear that it is better to also have float rather than not to have it. Isn't it? Gio

Eric, That is a strange way to look at it... Usually, the more businesses you have, the more diversified you are... Of course, all of them can go wrong together... But most of the times, when one thing doesn't work, the other helps to mitigate the negative outcome... And that's precisely what's happening this year... Losses from investments are somewhat mitigated by an underwriting profit. Of course, everythig CAN go against you... That's why you want to rely on people you have great faith in and respect for, who know how to build both a portfolio of investments and a portfolio of insurance contracts together. Let me ask you a question: would you ever bet against the couple Mr. Buffett + Mr. Jain? Why would you then bet against the couple Mr. Watsa + Mr. Barnard? Gio

This of course is difficult to answer. But I like what I see. I see Mr. Watsa buying insurance companies that are good companies, and no more deeply troubled at a steep discount. Of course, this is the way to go buying whole companies. Furthermore, I have great respect for Mr. Barnard and what he has achieved at OdysseyRe. And the idea to put him in charge of all insurance and reinsurance operations is a valid one. Is Mr. Barnard a good underwriter? Is Mr. Watsa a good investor? If you answer yes to both questions, you should be an investor in FFH. Gio

So you think that investing is less risky than insurance? Just look at Mr. Brindle: he shuns investing altogether and relies solely on insurance! It's always about people. It's people that matter! So, choose the right partners and let them do what they do best! Gio

Well, let’s just forget for a moment about this board, which is filled with genius investors! ;), and look at the statistics about hedge and mutual funds around the world… To outperform the S&P500 by 3% annual you probably must be in the top 1%. If the S&P500 is priced to achieve something like 3% annual for the next 10 years, like a believe, you have to be able to choose one fund among the top 1% performers to get a 6% return, and you won’t benefit from leverage. If you want a 12.2% return (an outperformance of 9 percentage points each year) probably you must be able to pick one fund among the top 0.1% performers… and maybe that won’t still be enough! Or else, you buy FFH. Gio

Operating profits from insurance and reinsurance operations as of September 2013 were $160 million, or 2.12% FFH’s equity at 2012 year end. This is a 2.8% ROE annualized. To get to 15%, you only need 12.2% from investments. Given their leverage, a return of more or less 5.7% from their portfolio of investments is needed. Historically they have averaged 9.4% annual on their portfolio of investments. If this is not a margin of safety, I have never seen one. :) Gio They are tremendous investors and can achieve much of what you talk about if they were to shut down the insurance operation. You say they only need 12.2% from investments. What, and they need to run an insurance operation for that... why? Insurance forces them into a lighter equity allocation during market cheapness periods. Hasn't Chou Funds kicked the crap out their returns the last 5 years without an insurance operation to worry about? I mention Chou because he's about as FFH as you get without actual working there anymore (he used to be a VP there). Actually, I said they only need 5.7%... to get to a ROE of 12.2%, which, with 2.8 percentage points added by underwriting profits, gets you to a 15% ROE. If I am not mistaken, it was Mr. Buffett who said some time ago: Gio

Operating profits from insurance and reinsurance operations as of September 2013 were $160 million, or 2.12% FFH’s equity at 2012 year end. This is a 2.8% ROE annualized. To get to 15%, you only need 12.2% from investments. Given their leverage, a return of more or less 5.7% from their portfolio of investments is needed. Historically they have averaged 9.4% annual on their portfolio of investments. If this is not a margin of safety, I have never seen one. :) Gio

One more thing about FFH and the 2008/2009 experience. In three years (2007, 2008, and 2009) FFH’s BVPS increased 146%. Now, you might argue FFH is not as well positioned to take advantage of a market panic as it was back then in 2007, but I guess no one can say it didn’t take advantage of the last panic effectively enough! I don’t care about what its stock price did during those three years. All I care about is that during the panic its BVPS compounded at 35% annual three years in a row. That’s all I really need to know. If FFH nowadays is positioned half as well as it was back then in 2007, to take advantage of any future market panic, I am correct in my business judgment, and therefore satisfied (even if I have no clue about what its stock price might do in the future). :) Gio

Thank you, Eric! This truly sounds great! As I have said, much work for me to do in options and much room for growth… As you have said, it surely will be worth the effort! ;) Cheers, Gio

I didn’t mean that! You should know by now, if there is someone who buys insurance (maybe too much of it!), it is just me! Instead, what I meant is I don’t feel comfortable yet with the “technicalities” of options trading. That’s why I wouldn’t buy or sell options with much capital involved. Gio

That sounds like a very good strategy. The problem is I don’t master options half as good as you do… Half?! Try 1/5! Much better! ;) And I wouldn’t dare following your strategy with much capital… Options clearly is a field where I still have a lot of room for growth and improvement! :) Gio

Ah! Another thing: I don't want timing to be part of the equation! I am terrible at timing! ;) Gio

My pleasure, Liberty! :) Gio

Well, but, as I have said, I already hold some cash… The problem with cash is plain to see: it will do well only if a market panic really unfolds! In any other scenario it will do terribly… FFH, instead, will do fine, even if the market keeps marching upward (at least, that's my business judgement...). What I want is a portfolio of businesses (both private and publicly traded), that insulates me from what the market does (read what other people do) as much as possible. I don’t want the growth of my net worth “to depend on the kindness of others”. FFH has a very well defined place in this portfolio of businesses, and I don’t know of any other company that might replace it. Gio

I already hold both cash and some short positions… And I don't want to stay too much out of the game. Therefore, can you point me at a business, any business, not necessarily an insurance company, that is better positioned than FFH to take advantage of an hypothetical market panic? I would then gladly shift some capital from FFH to … Gio

Well, this I understand! You think they are not well positioned to take advantage of a market panic. Ok! No problem with that. It is a business judgment! Now, the fact I have no problem to understand your judgment about how FFH has positioned its business... of course, doesn’t mean I agree with it! ;) Gio

A wonderful book from first page to last. About the life and the methods of an unsurpassed financier and a great man. Gio