giofranchi

They wouldn’t. And that’s why I have said that to separate credit from payment will entail new costs. Cheers, Gio

If you assume that, then you are obviously right. No need for any further discussion. But I am not so sure that consumers will accept credit and payment to be separated… Once people are used to doing just one thing, they won’t go back to the need of doing two separate things… Therefore, I assumed instead that P2P will put pressure on V and MA’s margins, but without disrupting their business altogether. If this is the case, will their earnings trend lower? As I have said, it is not clear. Cheers, Gio

Now consumers have a service that does both. And it works very well. They have to do just one thing instead of two. I don’t see why consumers will ever accept to separate the loan making process from the payment process… Especially because it is not clear their overall costs will diminish substantially, since the loan making process, if performed by banks, will entail new costs. And the service, taken as a whole: the payment process done by Apple Pay + the loan making process done by banks, will lead to a much worse user experience than the service provided by V/MA. Will V/MA have to reduce their fees in the future? Probably yes. Will they penetrate new markets like India and China, where payments are still 90% cash payments? Probably yes. Which factor will prevail? Difficult to say, but it is not at all clear to me V/MA’s future earnings will be lower. Cheers, Gio

If it were so easy, banks would be doing that already, wouldn’t they? But the job of granting credit is not that easy at all. It would require many costs banks are not sustaining right now, and therefore it would certainly not be free to consumers. My understanding is that V and MA are able to assume those risks exactly because they are just two players in a very large market: they couldn’t extend credit like banks give loans, they couldn’t be studying in detail the spending habits of hundreds of millions of consumers. Instead, it seems to me they extend credit much like insurance companies underwrite insurance contracts: basing their judgements on statistics. The fact V and MA share between themselves the whole market gives them access to a large enough population, assuring that overall delinquencies will be manageable and, as a consequence, overall results will be satisfactory. The larger the number of players which grant credit to consumers, the lower the population each player will be able to reach, the higher the required controls will be, the higher the costs. Am I wrong? I am attached to neither V nor MA… I have just started a small position to study and monitor them… If I am wrong, no problem: I’ll sell them and buy GOOG instead! I just want to understand their market better. Cheers, Gio

Isn’t this supposed to be a global service? If consumers have to travel abroad, a service that grant them access to credit wherever they go is surely valuable. Isn’t it? Why would consumers choose a service that provides them with credit in the US, when they already have a service that provides them with credit globally? Cheers, Gio

What I meant is that to grant credit to consumers is not like developing video games. Whenerver you grant credit, you'd better make it your core business, or don't make it at all... The risks are much higher than putting together a bunch of smart app developers and producing video games. Am I wrong? Cheers, Gio

I am assidous buyer of both Amazon and Apple's products... And to do so I always use my credit card... Cannot say about Google... Though I think I can see how Apple and Amazon might compete in the payment business, I don't think it will ever become their core business. Cheers, Gio

Thank you SD! Just let me put it this other way: do you have a name?... I mean of course the name of a company that could disrupt V and MA business. A technology is never enough imo. There must be the willingness and the ability to take away business from incumbents so much entrenched and mighty as V and MA are. Which is that company? Thank you, Gio

I have read every post by SD on this thread… And sincerely I have understood very little… Can someone explain in easy to understand terms what is supposed to have so dramatically changed in V and MA’s business during the last 5 years? Thank you, Gio

I know, and I agree it’s selling for very high multiples. Unfortunately, it is selling at these levels since at least 2010 (the beginning of this thread)… Therefore, as usual, I have opened a position, leaving room to average down. Cheers, Gio

I have opened a position in both V and MA. Apple Pay might be a competitor, but I doubt it will impair V and MA’s business: Apple Pay imo is meant to be a valuable service in the Apple’s ecosystem, but it will never be Apple’s core business. And even a company with Apple’s wherewithal might have an hard time competing against V and MA, if it doesn’t make the payment business its core business… Furthermore, if Apple Pay is truly so much successful as to impair V and MA’s business, my investment in Apple could be viewed as a sort of hedge for the positions I have opened in V and MA. Cheers, Gio

+1! No guarantees in business nor investing, of course. I just wanted to point out that survivorship bias might be a much larger issue when you decide to invest with “outsiders” who have not actually proven to be “outsiders” yet! ;) Cheers, Gio

Yeah, I think this is a big issue. I don't think it is as bad as most of the management books (e.g., Good to Great), as capital allocation is clearly important. It may just turn out to really say, "pay attention to capital allocation!", which we pretty much already know. Not to denigrate the book, I enjoyed it a lot. What about sticking with those who have at least a 15 years track record of being great at allocating capital? Who are at the helm of great businesses with favorable secular trends as tailwinds, in industries where competition is kept at bay? How much is survivorship bias going to render the final outcome unpredictable then? Cheers, Gio

I agree with all you have said. The fact is I don’t expect anything spectacular to occur holding cash either… But it could! In the case of a crash that comes soon. Cheers, Gio

Ok, so do you see too rapid a P/B expansion right now? Cheers, Gio

Well, generally cash is a very poor choice in an inflationary environment… Will FFH do even worse?! Maybe, but I don’t see why we should assume that. Catastrophic losses in their insurance / reinsurance businesses? I agree it is a risk. But luckily enough they seem to have become much better underwriters than they were just a few years ago. Cheers, Gio

Great opportunities might come even if a general market crash doesn’t happen. Think about the recent rout in the pharma and biotech industry. If you hold a company that is very diversified and very well hedged against the gyrations of the stock market, you can sell it when some great opportunities present themselves. I agree with Eric that in a general market crash FFH might not prove to be a good cash equivalent, but in almost any other circumstance I think it could serve that purpose quite satisfactorily. In fact I would say FFH will be a better substitute for cash, if no general market crash comes our way. If, instead, we will continue to witness crashes circumscribed to specific sectors (energy, biotech, whichever will be next), I guess FFH will be a fantastic substitute for cash: because, as Eric has pointed out, the effect of a slow compounding machine will be added to the great optionality cash offers. Cheers, Gio

+1 Then what? 1) You are not worried about a crash at all and you are 100% invested, 2) You are worried about a crash that might come soon and you hold cash, 3) You are worried about a crash that might come some years from now and you hold FFH, 4) You are worried about a crash, but you don’t know when it might come, and you hold both cash and FFH. Which of the 4 cases? Is there a fifth? Cheers, Gio

If I am not wrong, FFH during the first quarter of 2009 wasn’t hedged anymore. It had taken its hedges away at the end of 2008. This being said, I think no one is expecting FFH to stay at the level it is trading today in a market crash. But you have two options: 1) To hold cash, 2) To hold a company whose stock might decrease less than your other holdings in a crash, in order to sell it and buy more of those companies you like and which have been more hardly punished in the crash. In other words, to sell a cheap stock in order of buying an even cheaper one. I don’t know of a third alternative (or maybe yes: simply being 100% invested all the time… but I guess that doesn’t suit everybody well!). Cheers, Gio

+1 That's similar to what I meant when I said that doing 3) will help you very much in getting better and better at doing 1)! ;) Cheers, Gio

I think CHRT, and I am not sure about LMCA... You might want to check it out! Cheers, Gio

Given they keep holding their equity hedges, and they keep holding lots of cash, I would surely like them buying more high quality companies at attractive prices. The fact the general market might be a bit stretched at this point doesn’t mean there are no high quality stocks selling at attractive prices. For instance, the companies controlled by Malone are cheap right now imo. And BRK has bought large investments in them during the last year or so. I surely would like FFH to follow suit. You know I also think AAPL is cheap right now: think of Mr. Icahn, who has said he is more hedged today than at any time in the past, and who has publicly said he shares many of the concerns FFH has about the general economy, but still holds a very large investment in AAPL. Cheers, Gio

Adam, I think you’ll do very fine. 1) To generate cash (as much as you can), 2) To save it (as much as you can), and 3) To invest it with great capital allocators: This is imo the name of the game. And don’t worry about the comparison to “the index”! To devote time and energy to 3) will yield good results and will enhance greatly your ability to do 1). Therefore, it will be worthwhile. At least, that’s my experience. If I could add something, I would pay attention also to the quality of the businesses (even a great capital allocator at the helm of a poor business will struggle, and I believe some of the companies in your list are not very high quality businesses), and to the price you are paying (for instance, I own MKL because I think it is very high quality, but I own a small position. Both BRK and FFH are cheaper today, therefore I don’t think you should give equal weight to all of them right now). My capital allocation strategy is dictated by the best compromise I can find between quality of management, quality of business, and price. I hope this might be useful. Cheers, Gio

I hope you are right. Until then FFH has a place in my portfolio as "ready cash" or "something that zigs while others zag". Cheers, Gio

Why such a poor opinion of Ackman? With this I agree 100%. Cheers, Gio