giofranchi

Look, my model considers a 12% CAGR in BVPS for the next 16 years… then FFH might as well completely close doors and distribute all its capital to owners. To get a 12% CAGR in BVPS, they have to achieve little more than 5% on their portfolio of investments going forward… Historically, they have achieved 9.2%. Even if FFH loses 2 or 3 more years because of equity hedges, I don’t think something “cataclysmic” has to happen for FFH to provide those returns to shareholders… But I would tell you a lie, if I didn’t admit that I am invested in FFH also because I think that the general market price level will be little changed 10 years from now! ;) Gio

Anyway, I have posted a model for FFH, which discounts its BV to the present, and arrives at 1.5 x BVPS. And it clearly underestimates fair value! So, probably, Eric is much more convincing than me… no doubt about that!! But I also have made the effort to communicate my thesis about FFH! ;) Gio

If Mr. Watsa is right, as I believe, BV today is extremely compressed! It simply is not a metric you could rely on, to arrive at a valuation for its stock. In 2007, 2008, and 2009 BV increased 35% annual. And go look at the numbers: FFH in those years booked much larger gains from its equity hedges than from CDS. Simply because its equity investments will fall dramatically less than the Russell2000, the index they are using to hedge. Then, with all that cash at their disposal they will take advantage of very compressed and undervalued stock prices, and position themselves like almost nobody else for the subsequent bull market. They are following the pendulum, and positioning themselves accordingly. They are extremely contrarian and therefore very hard to follow… but, sooner or later I still believe they will be proven right. Remember that business is always about decisions, better: strategic decisions. This is true for practically every kind of business, but most of all if it is a financial business. I am happy for your investment in BAC. And I will never invest in BAC. Simply because I have no idea of the process that goes on inside such a gigantic organization. And because I don’t really know who is in charge. What he has achieved in the past. Why he should achieve good results in the future. Because he hasn’t deserved my trust. And I invest only with people who have won my trust. Rest assured: it is not such a simple thing to do. This is how I do business, and it is also how I invest. Gio

Simply enough, here we have 3 possibilities: 1) Mr. Watsa is right: today’s BVPS makes absolutely no sense… FFH will create great value. 2) Mr. Watsa is wrong, and will recognize the evidence of his mistake, when that evidence comes: he will take losses on FFH’s hedges and use a stupendous amount of cash to restart from there… FFH will create good enough value. 3) Mr. Watsa is wrong, and he will never recognize the evidence of his mistake… FFH will cease creating value. Practically anybody on the board believes either in 2) or in 3)… I still believe in 1)… ;D ;D ;D Gio

Well, just have a wonderful holiday to spend with your loved ones! :) Gio

Guys, it is very easy an plain to see: if you believe Mr. Watsa & Co. will go on creating value, FFH today is deeply undervalued; instead, if you believe Mr. Watsa & Co. will cease to create value, FFH is not undervalued. Period. For my part, I repeat what I have said in another thread: under $380 I will buy more. :) Gio

No idea… Well, its peers in this market are by now selling for more than 1.3 x BVPS… Of course, they are making things that look smart, while FFH is making things that look dumb! Right? … We will see. Gio

This reminds me of Mr. Malone, who might have known and studied Mr. Sage’s methods. I must take heed and try to follow in their steps! ;) Gio

Gio

Eric, I didn’t want to “propagate any false dilemma”… ;D ;D ;D I simply don't care, believe me! ;) I have already said what I mean by “this time is different”: if Price / Sales and Market Cap / GDP have predicted quite reliably subsequent market returns for the last 50 years (1948-2003), and now they suddenly cease to, well, that’s what I mean by “this time is different”. And I am perfectly aware my meaning of “this time is different” is not what usually that expression is used for… Otherwise, if they haven’t predicted subsequent market returns reliably, then I would be very interested if someone might give me good evidence of the fact that Mr. Hussman has “massaged” the data. That’s all! :) Gio

Eric, Maybe I didn’t express my thought properly… I am sure that you are a much better investor than Mr. Hussman! There is no doubt about that! And I am also sure that for such an outstanding investor like you are, what the general market is likely to do in the next 10 years is completely meaningless! Mine was just a curiosity to understand exactly why and how 53 out of 108 people have voted for a new secular bull under way… An utterly useless curiosity!! ;) Gio

The ECRI guys are talking about the economy… about expansions and recessions… Very difficult to get it right! Here, instead, we are talking about earnings, sales, prices, and subsequent stock market returns… much easier imo! Or let’s put it this way: the S&P500 is a portfolio of 500 companies; Kraven’s portfolio, if I am right, sometimes gets to be composed by around 200 companies… Yet, I am sure Kraven’s has a very clear idea what his portfolio might return next year and for some years after that. (Kraven, please correct me, if I am wrong). Gio

Well, the fact that those models have stopped working is exactly what I mean by saying that this time is different… But my question is another one. When I ask if the historical data are correct, I mean: have those models truly worked from 1948 until 2003, or is Mr. Hussman manipulating the data? If they have worked for 50 years (and Mr. Hussman in other charts shows they have worked for 100 years), and now they have stopped working, well then this time is different. If they have not truly worked, I would like to see the evidence of their flaws. At least 51 people must have plenty of that evidence! ;) As an aside, I don’t think behavioral psychologists are charlatans… Far from me! I have read much of their work and I find it very useful… Yet, great wealth builders of the past have achieved extraordinary goals simply being more sensible and self-controlled than other people… And they have done so, well before the terminology “behavioral psychology” was invented or even dreamt of! The younger we are, the more we tend to overestimate the true importance of almost anything that grabs our attention… Temperament is paramount in business, no doubt about that! But the usefulness of those books, that at least try to teach us about our temperament and its potential pitfalls, should not be overestimated! In other words: The Mentalist is and will remain a TV Series!! ;D ;D ;D Gio

This I don’t understand… If you know better valuation models, I mean models that from 1948 until 2003 have a track record of predicting stock market returns better than the ones on page 8 and 9, very well then I would like to see them… But I don’t understand how they could lead to different conclusions… Once again, either the data are flawed, or this time is different. Gio

Well, first of all I hope he invested in WFC, while shorting the general market… That is much different than sitting in cash! The real problem with Mr. Hussman maybe is that he is not a very good stock picker! But that is a completely different story… Anyway, I am not interested in how good Mr. Hussman is as an investor… Who cares?! Instead, I wanted to understand if 51 people think the historical data he shows are flawed, or if 51 people think “this time is different”. Gio

tombgrt, no prediction about the future here. I just would like to understand if Mr. Hussman’s historical data are correct or not. I think it is relevant to the discussion on this thread, because we are really left with only two possibilities: 1) Those historical data (chart on page 8 and chart on page 9) are flawed, 2) 51 out of 103 people have voted for “this time is different”. Possibility n.2 gets me very nervous… Not because the future is bound to repeat the past… Once again, no prediction about the future! But because, in the rare instances when this time really is different, only very few people get it right… Viceversa, when 50% of the people think that this time is different, usually it coincides precisely with the situations in which the future repeats the past… Gio

Eric, of course the charts I am trying to disprove have some relevance with the discussion on this thread!! Leave profit margins alone for a second, and just look at the chart on page 8 (Price / Revenue) and the one on page 9 (Market Cap / GDP). I am only interested in the past… no prediction about the future! My question is: are the data on those charts accurate? And, if not, can anyone show me better data, please? Gio

Eric, You mean mistakes in reasoning or in data collecting? I don’t question Mr. Hussman’s reasoning might be wrong… But I am curious to know if his data collecting is also wrong. In other words, are the charts he shows flawed? If they are, does anyone know how they would look like, once corrected? Gio

Yes! But this is a “this time is different” argument. Instead, I wanted to know: does Mr. Hussman make mistakes in putting together historical data? Gio

Ok! I have used the wrong word… I mean: does someone have a different chart about the same subject? Gio

I think Mr. Hussman answers your question right beneath the chart on page 5. I am not looking for the answer… I believe nobody knows… I am just curious to know if those historical data presented by Mr. Hussman are right, or flawed. That’s all. Then, I guess you have not answered if we are in a new secular bull! ;) Gio

Thank you! This is a good argument! (Although the author himself doesn’t seem to be so convinced of the fact profit margins will stay this high…) What about the Price / Revenue ratio, and the Market Cap / nominal GDP ratio? Gio

When I say, does someone have better data?, I mean: can someone post a graph that goes back to 1950 and disprove the one on page 5 of 14? Because I have never seen one! Same with the Price / Revenue ratio, and with the Market Cap / nominal GDP ratio. Gio

This is a very good question and the answer is: profit margins will keep getting higher! ;) But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do! Gio

My problem with that is you must be a very rational judge of business value, not to make mistakes in an overvalued market… That’s why I think you are right… provided you are as good as Eric or Packer! And you might certainly be! I surely don’t know... Given your age, you have invested through 2008, and given you confidence, you most probably have done really well! I know I am not as good as that. Even my conviction in the true worth of my own companies is… well, a bit shaky!! ;D ;D Let alone my conviction about listed companies, that I will never know everything about. Therefore, I want Mr. Marks’ pendulum to help me a little bit: I want to pay attention to what other people are doing. And when they seem to be overly optimistic, I want to be a bit more cautious. Gio