giofranchi

Ok, if you hate hip-hop or rap, please, don’t go on reading… Otherwise, this is as close to a “free lunch” as it gets: a new 4 stars album from RollingStone “one of the year’s defining hip-hop releases”, that you can download completely free from the following link: http://www.rollingstone.com/music/albumreviews/acid-rap-20130508 Hey! Even if it were a cigar-butt, read a poor album!, Mr. Buffett would pick it up, read download it!, and take as many puffs as he could, read enjoy it as much as he could! ;D giofranchi

--David Herro, Harris Associates giofranchi

Well, this is much more sophistication!! ;) SharperDingaan, mine is the point of view of a businessman: believe me, what has become almost second nature to you, is not automatically clear or easy to put in practice for everyone else! Again, imo, what applies to 100 extremely sophisticated and extremely successful members of the board, doesn’t automatically apply to the remaining 1300, me included! Cheers! :) giofranchi

Like I've been saying since last year, I'm out of NA markets except for ~20% of my portfolio in FFH. The numbers show a huge amount of optimism, the Shiller P/E is over 23, etc. Any major piece of bad news can easily provoke a 40-50% crash. Europe has a Shiller P/E below 14, and you can read everyday articles in FT and other serious publications warning of an impending eurozone break up, half of Europe is in deflation, etc. We haven't had any QE yet, only austerity and more austerity. The indicators show that all that pessimism is baked into stock prices. Which market do you think has more upside? txitxo, you already know we have different views here… If the US stock market crashes, every other market all around the world will follow suit. Valuations, pessimism, etc. won’t matter at all. I don’t know of a single instance in which the US stock market crashed and Europe’s instead proceeded undisturbed! Not a single one. I don’t see why this time should be different: imo, everything will fall together. giofranchi

wisdom, words of wisdom! ;D ;D ;D giofranchi

Hi hellsten, unfortunately I think I cannot help you… I have no interest to invest in the Italian stock market… I know it is very cheap, and I might be missing a very good opportunity… but I don’t know of any public company that really interests me, in which I would invest for the long-term. As strange as it sounds, I consider the Italian stock market to be “outside my circle of competence”… ??? giofranchi

Eric, I am not sure I have understood your comment… You really see opportunity costs today?! ??? Well, even if there were some opportunity costs today (Hey! They are very well hidden!! ;)), FFH is trying not to incur opportunity costs that will be 4 times higher in a 1 or 2 years time! That is obvious, so I must have missed the true meaning of your comment… giofranchi

SharperDingaan, I am sure your trading strategy must be much more sophisticated than that: 1) Ever since I have started following FFH on a daily basis some years ago, it has never traded below 0.95 x BV… 2) At 1.1 x BVPS FFH is cheap. The market already is irrational about FFH. Of course, you could bet on the fact that the market gets even more irrational… But I don’t make such bets… What if, instead, its price from now on fluctuates in between 1.1 x BVPS and FV? While BVPS compounds at 15% annual? Following the trading strategy you have suggested, I would completely miss a wonderful investment, that I think I understand very well, and in which I think I can put full confidence. The problem is you cannot afford missing many such investment opportunities, because most probably you will find just a few in a lifetime! It is clear you know the dynamics of short selling much better than I do… So, I must again admit that I don’t understand why FFH could have gone under… Anyway, what I know about business follows: a business that is still controlled and managed by its founder, and that still has an equity > 0, is solvent, no matter what short sellers say or do. My business has equity > 0, and I have full control over it: if anyone, no matter who he or she is, comes to me tomorrow and says I have to close doors, I will be very glad to meet him or her at the door... with a gun in my right hand and a rifle in my left hand!! ;D ;D During its 27 years of great results FFH has experienced a maximum yearly drawdown in BVPS of (21%) in 2001: not even enough to wound it seriously, like subsequent years have demonstrated. giofranchi

Or, maybe, like petec pointed out, they are just highly illiquid? I am just guessing here… Of course, you are right! But that’s precisely why I don’t see Mr. Watsa boast about capital gains that he knows will necessarily have be reversed in the future! Still, I am going on guessing… In general, I agree Mr. Bradstreet will have an hard time replicating past successes. But to post capital losses on a bonds portfolio managed by him quarter after quarter seems too pessimistic! giofranchi

Yes! That makes sense, thank you! Though, Mr. Watsa wrote enthusiastically about California bonds in his AL2012: He spoke about $1,279.5 million in unrealized gains and didn’t warn about future capital losses, if they were assured?! It seems very unlikely… What I have always admired the most in Mr. Watsa is something I look for in everyone I choose to partner with: “an under promising, over achieving attitude”. Now, he boasts about capital gains, failing to warn about future capital losses?! ap1234, what makes you believe that those bonds are selling above par value? Couldn’t it be that in 2009 they were just selling circa 18% below par? After all, like Mr. Watsa has pointed out, in 2009 California was considered to be on the verge of being non-investment grade. And now, after appreciating 22.9% on their original cost, they are trading around par? giofranchi

--Chuck Akre, Akre Capital Management giofranchi

Sorry, but I don’t understand. Why keep a bond bought at $50, that is trading at $120, and that will mature at $100? At $120 it is clearly overvalued! Why wait for it to mature, instead of just selling it at $120? I must be surely be missing something here, but I don’t understand why Mr. Bradstreet would keep overvalued investments. giofranchi

Hi ap1234, from Q1 2011, when FFH started reporting investment results on a marked to market basis, as required by the IFRS, the only two quarters in which FFH declared a loss on its bonds portfolio were Q1 2011 and Q1 2013, and cumulatively they have declared a gain of $1,278.7 (2011) + $728.1 (2012) – $119 (2013) = $1,887.8 million. I understand people might be worried that future results from FFH’s bonds portfolio won’t match past results, because interest rates are bound to rise sooner or later… but, to lose money?! With Mr. Bradstreet managing that portfolio?! I might be wrong, but just don’t see it happening! :) giofranchi

Yours has surely been the most exciting and thrilling of week-ends!! I envy your chat with Mr. Kyle Bass, I envy the Southern California sunshine… I also envy the sleet and rain in Omaha!! ;D And your joke about the different weathers and the different moods is great fun! Cheers! Gio

Hi David! So, how was the conference? Any thought to share with the board? Thank you very much and take care :) giofranchi

--Bruce Berkowitz, Firholme Capital giofranchi

SharperDingaan, 1) I really wish I knew how to buy in the troughs, and how to sell on the crests, but I don’t… I think Parsad said there are 1,400 members of this board. Maybe 100 of them know how to buy at the bottom and how to sell at the top… what about the remaining 1,300? What I think I know is how to recognize a wonderful business, and how to wait for the right price to get in, then I “own” a wonderful business, I do not “trade” it. Will I get inside the Forbes400? Most probably not. Will I be financially successful and do what I enjoy doing all my life? Most probably yes. 2) No, you don’t have to hope for hurricanes. You just have to do what any shrewd businessman is doing right now: to be cautious. It has been 4 years now that, despite debt all over the developed world has never been higher in human history and despite the fact that central banks need to go on buying new debt at an ever increasing speed, the market has done nothing but going up. You must be cautious. Ask yourself: what would happen to the market, if central banks stop buying? I repeat: you must be cautious. And to be cautious means not to reach for yield: as I have said, FFH could increase BVPS at 7%-10% annual WITH equity hedges in place, if it keeps achieving CRs around 95%. To be content with 7%-10% annual is to be cautious. In a two years time, either a hurricane will have come our way, or we will have dodged a very dangerous bullet. In both outcomes equity hedges will most probably be gone, and FFH will resume compounding BVPS at 12%-15% annual (exactly what a wonderful business is meant to do!). Irrespective of the outcome, what FFH is doing now is what should be done. I don’t understand what you mean. Could you please elaborate a little bit further? Thank you, giofranchi

+1 :) giofranchi

--Seth Klarman, The Baupost Group giofranchi

Hi One World Trader! And welcome to the board! I agree with you, and I simply think any father/mother should make his/her children read “The Richest Man In Babylon”, as soon as possible! And, sincerely, I don’t understand how this book is not mandatory reading in school… … Cheers! :) giofranchi

You don't really need margin calls. You just need a lot of other relatively more appetizing bargains. I'm sure if WFC is at $8 again, AXP is at $10 again, etc.. etc... a given number of shareholders will once again dump their FFH. Given the hedges, there will always be people who hold it as a "defensive" position, an "alternative to cash". Those people will be gone when huge bargains arise. Anyone buying their FFH shares will have to ask if the price for FFH is low enough to make them choose FFH over the rest of the bargains out there. Thus the price will come down. --Seth Klarman If FFH makes a ton of money and its stock price declines nonetheless, I couldn’t care less. The CAGR in BVPS for the next 20 years is all I care about. :) giofranchi

--David Einhorn, Greenlight Re giofranchi

Selected excerpts from Seth Klarman's latest letter. giofranchi Klarman-Q1-2013.pdf

Hi tombgrt, Yeah…! I thought that would be the most likely objection… But I think it misses the true potential of FFH today... And that’s what we should try to understand, investing in any business: its true potential. Both optimism and pessimism won’t do it, realism is all that matters. And what’s unrealistic in saying that it is HIGHLY UNUSUAL for FFH to post a loss on its bonds portfolio? And that it therefore could be just noise? If I had said: without the losses in equity hedges, net earnings would have been… then, I would agree with you! Because we know equity hedges are here to stay, until a big correction in the market comes. Bonds losses instead are an “anomaly” that in Q1 2013 masked the true potential of FFH, provided it keeps doing such a good job with its insurance and reinsurance operations. On the other hand, I agree with you that one quarter doesn’t make a trend… and that it has been quiet for now… Anyway, I cannot help but liking very much the effort FFH, under the leadership of Mr. Barnard, is putting in the betterment of its insurance and reinsurance operations: not only CRs are coming down, but Net Premiums Written are rising too… so far so good! And it bodes well for the future! :) giofranchi

As always, discussion has centered on the equity hedges, but I would like to shift the attention to the $119 million of losses in bonds (basically all unrealized). It doesn’t bother me at all, because, out of a $10.4 billion bonds portfolio, it is just a (1.14)% move, so it should be considered only noise. Yet, I think it shows something important: without that loss, FFH for Q1 2013 would have almost doubled, from $162 million to $281 million. And, adjusted for the $10 per common share dividend paid in Q1 2013, BVPS would have increased 2.25%, instead of 1.3%. Which equates to a 9% increase in BVPS on a yearly basis. If you think that most of the times FFH makes money out of its bonds portfolio, I think something very interesting can be inferred from Q1 2013 Results: If FFH’s insurance and reinsurance operations go on posting combined ratios around 95%, FFH has the possibility to compound BVPS at circa 10% annual, even while keeping in place its deflation and equity hedges, and even while sitting upon $7.5 billion of cash on the sidelines! I know you now will tell me that I am always too optimistic on FFH’s future prospects, but what’s so wrong with my reasoning? :) giofranchi