giofranchi

Great answer from Mr. Watsa on the importance of building cash, when there are not many opportunities: Q4 2012 FFH Conference Call giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

VAL9000, I agree with most of what you have written. Except that, personally, I don’t find it so hard “to just sit, wait and do nothing”. Not that I am such a lazy boy! It is just that I can shift my attention to improve the operating side of my businesses. Until things change, and some new, intelligent opportunity for capital allocation comes up. You don’t have to be a business owner, to behave like that. Any profession or a job provide you with the same optionality. Just focus on improving your cash generating abilities, and, when the right moment comes, you will have a lot of capital to put to work! giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Here is the link to the full transcript of the Q4 2012 Coference Call: http://seekingalpha.com/article/1188131-fairfax-financial-holdings-limited-management-discusses-q4-2012-results-earnings-call-transcript?source=email_rt_article_title giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

In “Margin of Safety”, where he discusses hedging, Mr. Klarman has written: So, FFH really is “the best of both worlds”! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Christopher1 pointed me to the very good answer by Mr. Biglari: Find it in attachment. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes Biglari-15feb2013.pdf

I just want to point out one thing here. Not that I necessarily disagree, but not everyone may even accept that a secular bear market or a debt super-cycle is even something which exists. That's probably where some differences in thinking are. History is a useful force in finding today's patterns, but you can't get too close to using the patterns of yesterday to define "where you are". rmitz, I do agree with you. But I cannot replicate txitxo strategy. To find stocks that are always statistically cheap on a worldwide basis is something I would be a real patsy at! Most of all because it is something I don’t like to spend my time doing! Have you ever become a master at something, without loving it? I doubt it. Instead, I like to find and study a few enterprises, which I can thoroughly believe in, and where I can put significant amounts of capital. And, if those enterprises aren’t exceptional bargains at the moment, I must somehow assess the risk of owning them. My judgment could be wrong, of course, but I guess a wrong assessment of risk would still be less detrimental to my overall performance, than trying to play a game at which I have neither skill nor interest at all. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Well, you know I invest like I do business, because that is what I understand and that is where I think I have an edge on other people. To rely too much on numbers simply is not my game. On which numbers, anyway? Peter Lynch managed his fund right at the beginning of the most fantastic secular bull market in history… Are his numbers really reliable for what might happen in a secular bear? Not any secular bear, but a secular bear at the end of a 70-year debt super-cycle? I am skeptical… You have compared, what I called “a deep understanding of a business”, to “solving geometrical problems in 15-D space”… But that’s just because “to do business” is not your game… and so you cannot really be confident to have any kind of edge in taking business decisions! How could it be different? But, listen, I feel exactly the same about your statistical way of choosing investments! Because I know I could never compete with someone like you at that game! A businessman would never invest in a company based on some statistical analysis, exactly the same way a statistician would never invest in a company based on some deep knowledge of how it truly operates and creates wealth… it seems obvious to me! Like it is obvious that both a businessman and a statistician can be very successful, each one playing his or her game! I am confident I can have at least a moderate amount of success, even if I confine my investing to a still narrow circle of competence: 1) it was Mr. Buffett himself, who advised that what really matters is not the ampleness of one’s circle of competence, but the knowledge of its boundaries and the discipline not to stray outside of them, right? 2) I hope my circle of competence will get larger and larger in the future. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

On the contrary! Imo, they should be praised for taking a defensive approach! Anyway, let’s put opinions aside for a moment. What really matters is they have the strength to behave like anyone should behave, except that no one else has the strength required to do so... It is anyone’s duty to assess risk, and to choose the proper course of action accordingly. When your judgment hints at a “high risk environment”, you must accept a 6.5% return, and not reach for yield, or try to outperform the market. It really doesn’t matter all that much if your judgment will be proven right or wrong. Because, most probably, sometimes it will be proven right, and sometimes it will be proven wrong. It is the discipline that matters. And we all know that, but we all experience great difficulties going from theory to practice… well, the best practitioner I know of is, without any doubt, Mr. Watsa! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Once again I know many of you will boo me… but once again I must acknowledge how much in fact I do agree with what Mr. Biglari writes and with how he operates. Take, for instance, the following quote from his latest shareholders letter: That’s exactly why I understand and believe in “opportunistic and strategic thinking”. Now, another quote from the same letter: That’s exactly how I think about my still very narrow ‘circle of competence’. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Some short positions not only might limit drawdowns, which don’t concern me a lot, since I work only with equity, they also diminish opportunity costs. And that, as far as I am concerned, is key! Listen, I think the art of Buffett and others, you referred to before, is really nothing but a deep and “intimate” knowledge about how some businesses work. If you possess that knowledge, you can judge their future prospects better than the market, and therefore take advantage of the fact that the market might repeatedly price them in a wrong way. For instance, I am truly convinced the market is unable to price correctly “machines that can compound capital at high rates of return for many years into the future”, to pay BV for something like FFH is madness. Now, let’s say that I know more or less 20 of those compounding machines very well. With the only exception of FFH, I believe all of them will see the price of their stocks come down in a market correction. And here is my current allocation of capital: 100% of what I would like to have invested in FFH, 50% of what I would like to have invested in other compounding machines. You see? It is the opportunity to buy more of an outstanding business at even lower prices, that I don’t want to give up! I don’t care about drawdowns! The insurance I buy is against opportunity costs that might be too high! Now, let’s say Mr. Buffett and others know 1000 compounding machines, instead of 20. If I know 1 in 20, that I have the confidence to be already 100% invested, Mr. Buffett would at least know 1000 / 20 = 50, let’s say 30 such companies! More than enough to fill a whole portfolio of long only investments. That’s why I think that the so-called ‘circle of competence’ is very important. The wider your circle of competence, the less your need for insurance buying. Because, if you have a portfolio of investments, the return of which will be almost unaffected by whatever the market does in the future, you will incur no opportunity cost. When the opportunities arrive, you just might switch from your current holdings to those new and better bargains. For instance, right now I am 50% invested in LMCA. Should a market correction come, I am positive the LMCA stock price will decline, offering me an even better opportunity. Vice versa, the FFH stock price might hold its current level or even rise a bit in a market correction. Therefore, I will be able to shift some capital from FFH to LMCA. Actually, if I knew 5 FFH, I would not need any insurance at all. And I would be invested 100% long. :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Well, actually I hold very little cash. But I do hold some short positions. Maybe, you are right from a statistical point of view. But the businessman perspective that I always hold very dear (because is what I think I really know and understand) advise me otherwise… Never, not in a single instance, my firm’s engineering works caused any problem from inception (2004). They always adhered to the highest quality standards, and were always delivered on time. Yet I have always bought insurance, which has always been a net loss for my firm, and I will continue to do so nonetheless. I will never do anything (at least not in this world :) ) without buying some insurance. Generally, I don’t like the mutual-fund business model. I think it has some serious flaws. I look for great businesses that I am sure I understand much better than the market. The fact is simply I am convinced great businesses are always led by outstanding capital allocators. Because I understand and believe in “opportunistic and strategic thinking”, while vice versa I don’t believe in “business-plans” or in “star CEOs”. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

“It is almost impossible to overpay the truly extraordinary CEO… but the species is rare.” - Warren E. Buffett giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

For anyone who might be interested, please find in attachment Baupost's equity portfolio analysis by gurufocus.com giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes GuruFolio_SethKlarman_dec2012.pdf

Ireland shows the way with its debt deal - FT.com giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes Ireland_shows_the_way_with_its_debt_deal_-_FT.com.pdf

Wells Fargo on student loans giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes StudentLoansCEC_02112013.pdf

Sprott Market Insights February 2013 giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes SPPP-Market-Insights-February-2013.pdf

PlanMaestro, you obviously know many more companies than I do, and you are comfortable investing in a wide range of opportunities. If I had read every post on the BAC thread, I am sure I would be able to judge its intrinsic value as well as you do. But… I cannot find the time! Really! And, please, believe me: it is not a matter of laziness on my part! I think I am a true workaholic… and I would enjoy tremendously knowing all you know about BAC! The truth is I MUST be selective. Remember Mr. Marks? Double level thinking: not only should I be able to correctly judge the future prospects of a company, but I must also be able to have a view on them, which is different from the one held by the market, and most of all which is correct! Wow! It sounds like a lot of work is required for just one company! Hard work! I cannot delve deep into everything. Capital allocation is one responsibility of mine… maybe the most important responsibility, but of course not the only one. And I have chosen to know well a few things and to wait for the right prices before investing. It is limiting, I know. What I call my ‘circle of competence’ expands very slowly... But I think it would really be foolish for me to behave differently. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

A rare interview with Ergen (64min). http://allthingsd.com/conferences/dive-into-media/livestream/?mod=atd_divemedia2013_300x100_livestreamduringpost Sportgamma, thank you very much for posting! Always can count on you for “rare interviews” and interesting articles! giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

bmichaud, you already know very well what my point of view is. But I think txitxo has a good point too. Because at the end it all depends on your circle of competence. For instance, as a business owner and manager, I like to study companies and to delve as deeply as I can into every meaningful aspects of their operations. I know personally, from my own experience of managing businesses that I control, how difficult it really is to know and understand them very well. So that I know I could never completely rely on some kind of “statistical” difference between market price and fair value. I am just too skeptical of being able to assign a fair value to 100 companies, a fair value that would still be (almost) correct, come what may in the market as a whole. And, if I cannot assign a fair value, I cannot either estimate a reliable rate of return for my investments. So, my circle of competence is VERY narrow and limited (let’s say, more or less 20 companies). And, if I cannot find bargains inside my circle of competence, I just prefer not to invest… txitxo, instead, views things differently: he is a scientist and relies very much on his statistical models to find undervalued bargains worldwide (Europe, Japan, you name it!). And he can muster the confidence that he is getting good bargains, come what may with the market in general. I understand his point of view, and I think he understands mine. I judge both of them to be valid, they are just different. :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[amazonsearch]What's Behind The Numbers[/amazonsearch] Find in attachment a review of “What’s Behind The Numbers”. I have found the book to be an interesting read. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes Review_What_s_Behind_The_Numbers.pdf

giofranchi: can you stop for about a week? I need my bid filled at 0.9xBook :) ;D ;D ;D giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Parsad, may I ask why? I have just bought the book Mr. Munger suggested at the DJCO Annual Meeting: “Something Out of Nothing”. It seems that Mr. Krauss “shows” how a universe doesn’t need a Creator. And I am really curious to know the true reasonings that stay behind such a statement, and to which conclusions they might lead the author. Even if it were plausible that something could be created out of nothing, I believe Mr. Pascal judgment is still very relevant: I cannot be sure if God exists, and I cannot be sure if God doesn’t exist. Therefore, I choose to believe in the existence of God, because it is more convenient for me. And I choose to act accordingly. Please, don’t misunderstand me: this has nothing to do with investment results. I don’t know if faith adds or subtracts value, as far as investment results are concerned. I don’t think I have paid enough attention to which consequences faith might have on investment results… so, I really cannot judge. My question strictly pertains to your statement, that I have quoted. Thank you, giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Might be right in the short term, especially if the market continues marching higher. But the stock price seems to reflect this sentiment, and I personally wouldn't bet against them in the long run. I keep on buying Fairfax... and buying, and buying, and buying... giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Yes indeed. He mentioned Otis Elevators as an example of a US manufacturing concern that actually had/has a moat. This was related to the question about manufacturing in the US. I found it surprising to see Gio post on Otis, when I had only heard about the company a couple of days before. txlaw, I would really like to say that Mr. Munger and me share some sort of “telepathic thought affinity”… unfortunately, I must admit that was just plain good luck!! ;D ;D ;D giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Yes! I think it is a good book. Most of all I think it is useful. Mr. Pink has the ability to focus on the 1% that is really important in many fascinating books and articles he has read. Then he knows how to put all those 1% together in a cohesive narrative. Nothing really new! But after reading a little book of 233 pages, you feel like you have read an entire library!! ;D I also enjoyed “Drive”. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes