giofranchi

Thank you very much dcollon, I had already read both speeches on “Poor Charlie’s Almanack”, anyway it is always useful to have pdf copies! :) giofranchi

You very well know who said that! Let me tell you a story. Gino is the father of Giuditta. And Giuditta is a partner of mine in AMiS. Well, Gino is by any standard a very successful real estate operator in the area of Bergamo, 30 km outside Milano. It happened that in 2007 he possessed a big, still undeveloped, lot of land for residential and commercial construction. And he decided to invest 25 million Euros (at the time they were more or less $37.5 million) to build 80 apartments, a commercial plaza, and many underground parking lots. I still remember that I objected: “Gino, are you sure you want to go “all in” and use the entirety of your cash reserves? Who knows what might happen!”. He answered: “Don’t worry. I possess other 20 buildings, more or less 300 apartments which assure me a continuous stream of cash, via rent payment, each month. Furthermore, also my commercial activity (he is a wholesale dealer in construction materials) provides me with more than enough cash.” Well, you might guess what actually happened: at the end of 2012, five years later, he has sold only half of the 80 new apartments, 2/3 of the apartments he possesses are delinquent and have ceased paying the rents due, his commercial activity is in a slump. The only thing that saved him is the fact he is completely debt free (a sort of protection). But don’t even think of looking for opportunities in the real estate market right now…! His capital is frozen and completely locked in troublesome situations. So now, would you tell me why something like that couldn’t happen to me? Mr. Ray Dalio is famous, among other things, for the following rule: Make sure that the probability of the unacceptable (i.e., the risk of ruin) is nil. Well, I have my own rule, which is even more demanding: Make sure that the probability of not being always able to take advantage of the situation, whatever might happen, is nil. As I have already said, it all comes down to know yourself and your situation. And I know that, if a correction comes, and I had all my firm’s capital already invested, and the stream of new cash dried up, exactly like it happened to Gino, I would torture myself! Instead, having sub par returns for a few years is something that, although not pleasant, I can manage with ease. Moreover, as I hope I have shown you, if my longs start performing well, returns might be not bad at all! ;) Once again: that is me and only me! And if you think about it, in fact I am a little weird… Because most people would feel the exact opposite! They would suffer much underperforming while the market is in rally mode, instead they would bear quite well with a downturn (provided that at least Mr. Dalio’s rule is not broken…), because everybody else is helpless too. Thank you very much, but I have no unique ability. If I had a unique ability, that would be the best protection by far! That’s why I think it is dangerous to try and imitate Mr. Buffett! I simply try to do what any businessman should do: to find great managers. What I have just read on the subject in Mr. Taleb’s “Antifragile” follows: I totally ignored I had some of the venture capitalists genes in me! 8) giofranchi

Thank you very much biaggio, I always enjoy your posts too! And I hadn’t seen the video of Mr. Zeke Ashton yet, but I think it fits perfectly with what I was trying to say. I probably run a more concentrated portfolio (9 positions, with a very large one in FFH) than Mr. Ashton’s, but wide diversification seems to be what works for him and what he is comfortable with, right? ;) giofranchi

Hi berkshiremystery, no, the Consortium MIP is the largest, and by far the most popular, of its kind inside the Politecnico di Milano. But it is not the only one. The master school we mange is an organization founded 82 years ago by the Pesenti family of Italcementi, which remains its main sponsor to this day. Unfortunately, we are renewing our website, so only the homepage is available right now: www.masterpesenti.it. Anyway, if you are interested, you can download there a brief presentation of the school. The Consortium we belong to is the Consortium CIS-E (www.cise.polimi.it), which we also manage. Unfortunately, no such thing as “value investing” is known in Italy yet…!! ;D ;D Next February I think I will be the first to teach some classes about value investing at the Politecnico di Milano! Very basic stuff: practically, I will read and comment “Margin of Safety” by Mr. Klarman to some engineers and architects. Professor Reggiani of the Bocconi University, who wrote many articles with Professor Penman of the Columbia Business School, will lend me a much needed hand… it will surely be funny! :) To start something like the Ben Graham Centre for Value Investing at the Politecnico di Milano would really be fantastic! I know the Dean of the Politecnico di Milano very well, but I lack the “economic background” to be convincing in this kind of matters… remember that I have studied to become a technician… well, it is true now I am a “Hero Member” of the “Corner of Berkshire and Fairfax Message Board”… that is great, but also the only credential in the field of investing I can show and be proud of!! ;D ;D ;D Unfortunately, whenever a large organization, like the Politecnico di Milano, is involved, what you know and believe is important, but not enough… also curricula and appearances matter! ::) giofranchi

thank you for these documents. wellmont, you changed your name? ??? Excuse my ignorance, but who is LM? Thank you! In attachment the latest from Mr. Don Coxe. giofranchi Don_Coxe_BMO_Capital_Mkt_Basic_Points_THE_FINAL_PROBLEM_12.21.2012.pdf

Com’n! Not even a mention of “The Dark Knight Rises”?! Well, at least you must agree with me that “Bat Wings” wins the title for “Best gadget of the year”!! ;D Talking about movies, I reckon “Prometheus” to be the most underrated movie of the year. As always, strikingly directed by Mr. Ridley Scott on a visual basis, it also provides the viewer with a sense of moral quest for mankind origins, that imho “Alien” lacked. And the fact that moral quest turns out to be an hopeless one , leaves you even more enthralled. It deserved better scores by the critics! Finally, I think you might agree with me that some words are due in remembrance of Mr. Ridley Scott’s brother: Mr. Tony Scott. Who, as you very well know, passed away this year. I have loved many movies of his (True Romance, Spy Game, Déjà vu, etc.), and he will be greatly missed. giofranchi

Well, WOW! bmichaud, thank you very much! You just wrote a treaty!! You see, by now I can claim to have read many posts on this board, and I can say I have come to know a lot of great people and thoughtful investors (and you are certainly among the ones I admire and respect the most!). So, please, I hope nobody takes what I am going to say as a criticism, but just as an observation I have made during these months of membership: generalization tends to be present a little bit too often on this board (I want to be clear: it is by far the best board I know of, and the only one I follow daily!), and generalization imho is very dangerous. Let’s take, for instance, my firm’s performance in 2012: 1) It generated fcf equal to 16% (dividends excluded) of its capital on December 31, 2011; 2) It lost 4.78% of its capital on December 31, 2011, on short positions; 3) It lost 5.94% of its capital on December 31, 2011, on its long position in FFH; 4) It broke even on its other long positions; 5) It distributed dividends equal to 2% of its capital on December 31, 2011. So, we increased capital by 16% - 4.78% - 5.94% = 5.28%. If you consider dividends, 7,28%. Now, if FFH hadn’t declined from CAD$437 on December 31, 2011, to CAD$357 last Friday, our results would have been in line with the S&P Composite: 5.28% + 5.94% + 2% (dividends) = 13.22% (AMiS) vs. 10.84% + 2.11% (dividends) = 12.95% (S&P Composite). Furthermore, if my firm’s long positions had done better than just break even, and FFH had advanced, instead of declining, we would have outperformed the S&P Composite by far (like it happened in 2011: AMiS +26% vs. S&P Composite +2.1%). And all of that without renouncing to the optionality that holding some short positions gives us! So, what’s my problem here? Well, the numbers seem to suggest my problem really is that I am not good at choosing my firm’s investments…! But that I SIMPLY CANNOT BELIEVE!! ;D No, really, I have the utmost respect for the people I have partnered with trough the stock market and I strongly believe I have never overpaid for their company and leadership: I am sure a lot of value will be created in the years ahead. So, where is the rub? Very simple, like Mr. Watsa has so often told us: our results will always be lumpy. There will always be years like 2012, but then there will also be years when we will grow by leaps and bounds. Results overall will be satisfactory (to say the least!). So, here is why generalization is dangerous: what is right and works for moore capital might be right and work for you in your unique situation… or it might not! Furthermore, your situation will surely change in time, and what works for you today might not work tomorrow. Are you more comfortable accepting lumpy results, or following the new market-timing system you have so shrewdly devised? I don’t know, I cannot answer. What I know is that I am not a trader, and I am not a financial advisor, and I am not a money manager. I am a businessman. And astute businessmen hoard cash, or buy some protection, in prosperous times, while investing very aggressively when the game gets tough. Another example: both longterm and writser wrote about investments in special situations. Once again, it might be right for them, it surely is not right for me… I have two goals: a) to maximize my firm’s fcf, and 2) to invest it soundly in owner-operators. Those two goals keep me busy from 7 a.m. until 7 p.m., 7 days a week. Then, from 7 p.m. to 9 p.m., I go to the gym… So, what should you do, if you were me? 1) stop trying to maximize my firm’s fcf, to study special situations? 2) stop monitoring the owner-operators I am interested in for my firm to purchase an ever increasing partial ownership, to study special situations? 3) would you stop going to the gym? And risk losing my athletic prowess girls love so much?!?! Don’t even think about that!! ;D ;D ;D And, please, forget about that Macro “Musings” thread of mine: those are things I read just for fun and to relax! twacowfca is also a businessman, though much more versed in financial matters than I am. But, even among businessmen, situations can be vastly different. Once he wrote me that his firm’s portfolio is now worth 20 times his firm’s operating business. twacowfca, please correct me if I am too way off the mark: assigning a 10x multiple to the fcf generated by his operating business, that means the yearly fcf of twacowfca’s business is more or less 1/200 of the capital he has invested in the stock market right now. And, assuming the capital he has invested in the stock market is all equity, that translates into a 0.5% fcf yield from his operating business. Much different from my firm’s 16% fcf yield! He simply must have accumulated much equity year after year, with an operating business that almost didn’t grow. Also my operating businesses probably won’t grow, but I am still at the beginning and haven’t accumulated much equity yet. So, the fcf from operating businesses is now almost meaningless to twacowfca, while it is still very relevant to me! twacowfca might surely be more interested in dabbling in special situation investments than me. Alas! Probably, he now must manage too much equity for special situations to be a meaningful part of his portfolio… One last thought, an obvious one, but anyway… You said my firm resembles BRK… well, too kind of you! But surely you meant the BRK of the ’60… well, if you meant a mini-BRK of the ’60, I just can be flattered and fool myself into overlooking the absurdity of the comparison! ;D And just like the fcf of BRK during the ’60 was far from being assured, also my firm’s fcf is very much at risk. We manage two businesses: 1) engineering services in the civil and infrastructure sector, 2) a for profit education master school inside the Politecnico of Milan. 1) is incredibly under pressure in Italy nowadays. Until now we have fared better than average, but the future is uncertain and we cannot go on swimming against the tide much longer… 2) has proven until now to be a reliable business in a recession, and we have strong links to our main sponsor (Italcementi Group S.p.A.), but we must deal nonetheless with the bureaucracy of a large public University… unfortunately, anything could happen! So, the need to be prudent. Ok, this is already way too long! But you gave me a lot of food for thought, and I hope I have now provided you with some more. Thank you again and take care, giofranchi

The reason, why I hold twacowfca is such a high esteem, is that he has the rare gift of making you see things under a light you have never seen them before. I guess it is the trait of a true teacher, the one only a few people, like Mr. Buffett, Mr. Munger, Mr. Kahneman, Mr. Taleb, Mr. Herbert Simon, Mr. Michael Lewis, Mr. Malcolm Gladwell, Mr. Dan Ariely, and few other authors, can truly claim to posses. :) giofranchi

An important question here is: do these guys hoard cash because they are afraid of the market valuation in general? Or because they can't find individual good investments? In fairness, probably a bit of both. But I'm sure that if WEB finds a terrific investment he's not going to pass because of the Shiller PE ratio of the market. No, I understood perfectly well what txitxo meant! But you must realize that, even if you are able to always find micro-cap stocks that are undervalued, when the market crashes, for you to make money, your micro-cap stocks must swim against the tide, to paraphrase Mr. Marks. And what I meant is simply that: for me to pretend that I am as good as Mr. Buffett in identifying stocks that can effectively swim against the tide, would be foolish and very dangerous! giofranchi

One last thought: Benjamin Roth One of the reason why I like to invest in owner-operators is because they usually behave like Mr. Mellon did. When everyone else is greedy, they hoard cash. Vice versa, when everyone else is fearful, they “absorb competitors for a song”. Then why, when it comes to our business, should we always be fully invested, and despise to “build up huge cash surpluses”? giofranchi

Things That Make You Go Hmmm... on Central Bank Balance Sheets and Gold. giofranchi 586_eva12.28.12na.pdf

You very well know it is always dangerous to quote Mr. Buffett and follow blindingly in his steps… for two reasons: 1) He is Mr. Buffett, 2) What fits his personality, and is right for him, might not be right for you. There is not just one way to be a successful businessman and investor! Think about it this way: would you invest in a company that has zero cash on his balance sheet? Or in a company that does business without buying some insurance? Or in a business which, regardless of market conditions and regardless of the nature of its operations, always keeps the same amount of cash and always buys the same insurance? Or in a business that, just because its most successful competitor keeps X in cash, just follows suit, holding X in cash too? Instead of judging and understanding the situation professionally, accepting that what applies to its best competitor might non be the best strategy for itself? One thing I am sure about: Mr. Buffett as an investor needs much much much less protection than me!! Some things, that are general, I dare say “universal”, concepts about investing, apply to me as they apply to him. Other things simply don’t. Thank you very much again: it is always a great pleasure to discuss matters about investing with you! And yes! May 2013 be a happy and prosperous new year (although I already know I will badly underperform!! ;D ;D ;D ) giofranchi

txitxo, I am advocating the “Yale Plan” as a non-predictive method, which enables you to shift gradually in and out of stocks, as general stock markets become less or more expensive. And that, as far as I am concerned, is the way to go. Because, while behaving like owners, we should never forget we are just “partial” owners: no matter how good a business is, no matter how cheap its stock is, when the other partial owners behave irrationally, or simply must sell their shares for liquidity reasons like it happened in 2008, we all are going to suffer the consequences. But I am absolutely not advocating the “Yale Plan” numbers! Actually, I don’t follow those numbers. And I think everyone should devise his/her own “Yale Plan”, in accordance with the times, the markets he/she knows and is comfortable to invest in, the correlation of his/her investments to the general market, even the currency of his/her country, etc. Let me explain: right now my firm’s capital is 75% invested in north american owner-operators, which have very low correlation to the general market (sometimes even inverse correlation, like it might very well be the case for FFH, OAK, and LRE), it has 10% in gold and silver, and 15% in short positions. Furthermore, my firm does business which is exclusively Euro denominated, while its investments are all USD denominated. Of course, I must consider the fact that in any stock market decline the USD tends to appreciate against the Euro. So, having USD denominated investments is a protection by itself. If my assumptions are correct, my firm’s portfolio will suffer no decline, even if the US stock market should experience a 40% correction. Vice versa, in an advancing US stock market I will surely under-perform (like it has been this year and will also probably be 2013). You see? My numbers are completely different from the ones advocated by the original “Yale Plan”, but the process, the so called modus operandi, is the same. Or, at least, I try to follow its basic idea the best way I can: increase or reduce stock market exposure gradually, as the stock market becomes ever less or ever more expensive. That is just my adaptation of the “Yale Plan”. But I really believe there is nothing wrong with holding a lot of cash! Take, for instance, Patient Capital of Mr. Vito Maida. From 2000 (inception of the fund) to 2011 he returned almost 250%, trouncing both the S&P Composite and the TSX Composite. Well, from 2000 until 2008 he held almost 80% of the capital in cash! While in 2009 he decreased the cash level to 30%. Also Mr. Seth Klarman is famous for lengthy times holding a lot of cash. giofranchi

Well, I am much less sophisticated… What I do is simply this: if I trust management, and, believe me, it takes a lot of time and a lot of work before I fully trust management, I let them do their job and question their decisions as rarely as possible. If management says: BV per share, after the deal will go through, is $424, that’s the figure I consider for my investing decisions. Because I trust the management to provide me with the data that are really relevant. And I must get to the point I trust management more than I trust my ability to judge the company. Because they will always know everything about the company, while my knowledge of the company will always be partial and incomplete (at best!). That’s exactly how I behave with any new project inside my own firm: I spend a lot of time, trying to find the right people, then I let them work. And I trust them, because they will always know a lot more about that single project than me. For instance, what’s the difference between goodwill (if the acquirer has paid too much) and an investment in an overvalued stock? MKL has $2.34 billion of equities at market value, or 62% of shareholders equity. I guess you should understand which stocks in MKL’s portfolio are overvalued, make a judgment of their fair value instead, and reduce MKL’s equity accordingly. My reasoning might be flawed, but, if you subtract goodwill from the value of shareholders equity, why shouldn’t you also adjust it for possible (if not probable) overvaluations in their stocks portfolio? It seems to me that it can get very complicated… giofranchi

Actually the number of deep value stocks (e.g. any of the Graham screens) is a mildly successful timing indicator. Maybe… But I don’t know how to act on that timing indicator. Take, for instance, my firm’s portfolio: 9 companies that I consider to be not only great businesses, but also great bargains right now. And I could double my firm’s exposure to anyone of them, without fear of being too concentrated in a single investment (with the exception of FFH, which already is 30% of my firm’s portfolio). And I could be 100% invested in them right now, holding no overvalued (or even fairly valued) stock. So, how could the number of deep value stocks help me? I still can actually find at least 9 bargains! The “Yale Plan”, instead, is very clear and very actionable: first, know which market exposure is safe and choose the percentage of your assets you want to invest in stocks, then look for bargains. Please, understand: I am not saying it is the right way to go! What I am saying is just that it is the way that most suits my personality… and my personality is full of flaws!! ;) txitxo and longterm, thank you both very much! giofranchi

I want to make clear that I don’t think Sir John Templeton’s “Yale Plan” is a timing system. Sir John Templeton followed the “Yale Plan”, BECAUSE he did not believe in timing systems! In fact, Sir John Templeton was among the first investors to look at stock markets all over the world. Even if he truly was a global investor, there were many times when he preferred to hold a lot of cash and bonds. I just don’t see the European markets shoot up, while the S&P Composite sinks… My best guess for 2013 (but who cares!!! ;D ): S&P Composite will go up, maybe not as much as in 2012, and European markets will outperform. And I will hold protections and I will underperform again!! >:( giofranchi

Well, it obviously depends on two things: 1) Has Markel overpaid for the acquisitions made for ventures? 2) Have the true economic values of the businesses Markel acquired increased or decreased? If the answer to question n.1 is: no, they have not overpaid. And if the answer to question n.2 is: after the acquisitions, they have kept increasing. Then, there is absolutely no reason to exclude goodwill from BV per share. Warren Buffett has clearly thought us in his 1983 letter to shareholders: And also: giofranchi

Well, I guess it was in “The Forgotten Man” that I have read Mr. Mellon disliked Mr. Hoover because: “He is too much of an engineer.” Engineers might be very smart and very good technicians, but to invest successfully you must first of all be “wise” and be a “deep thinker”. I know very few engineers who qualify… Of course, enoch01 and I are wonderful exceptions!! ;D ;D ;D giofranchi

- Jose Raul Capablanca, Cuban chess player who was world chess champion from 1921 to 1927 and one of the greatest players of all time History suggests the endgame for stocks is S&P Composite P/E10 of 10 to 12 in the coming years. When, of course, nobody knows. What will cause the decline in prices, of course, nobody knows. Will it be a gradual contraction in P/E, or will it happen all of a sudden? Of course, nobody knows. Even if you don’t believe that history will rhyme, and instead you believe this time it is different, you should ask yourself: can stock prices really stay elevated forever? What are the implications? Well, the most obvious implication is that we will never see a new secular bull in stocks again. Because the only true reason for a secular bull in stocks to begin is that their prices are very much contracted. So, if today you hold a lot of cash (or some put options, or some short positions), it means you believe in endgame n.1. Vice versa, if today you are 100% invested in the stock market, it means you believe in endgame n.2. But, please, don’t tell me the endgame is irrelevant, because, like Mr. Marks has said: “if you don’t follow the pendulum, and understand its cycle, then that implies you always invest as much money as aggressively.” Personally, I have an idea where the pendulum will be a few years from now, and I think the following quote is crystal clear: Prem Watsa, FFH Conference Call Q3 2012 giofranchi

The Baupost Group on the morality of the Fed Fortunately, my firm also generates fcf that I can go on investing, whatever happens to the stock market. But, its yearly fcf is just 12% to 15% the capital I have invested in the stock market. I believe my firm’s investments will do significantly better than the market, should any correction come. But a 30% decline in general prices would anyway mean that the fcf generated by the work and efforts of an entire year will be wiped out… Not so sure my partners will enjoy the ride… giofranchi And yet that would be the perfect time to add to your positions. I think a perfect example to point out to your partners is as bad as it was a few years ago look what a buying opportunity it also turned out to be if you had cash available. Are the partners family or private investors? Sophisticated or not? Both family and private investors (mostly friends). And not very much sophisticated... they are all engineers... ;D Really, I have control on my company… that’s not what worries me! I just don’t like to be “all in” all the times! Do you know of any Poker player who plays that way?! ;D Dry powder is important. Cannot believe otherwise… giofranchi

This of course seems the right thing to do, but properly identifying the rise and fall seems hard to do. I tend to think Marks guidance is the most useful for this, and as I said above, each time he's been asked in the last few years, he's said, "neither too optimistic or too pessimistic", or something along those lines. I tend to think that ignoring the macro is the thing to do, unless it is in the extremes (very high or low/very low)--if it is in the middle, stick with micro! racemize, let’s think for a moment at the history of debt super-cycles and where we are today. As the Keynesian Endpoint I posted in the Macro “Musing” thread shows (I think very well), the last time we were so close to the “Detonation Rate” was 1941. Mr. Watsa has repeated many times that the last comparable period in modern history, to the period we are living trough, are the ‘30s and the ‘40s in America (or the ‘90s in Japan). Now, if you read “The Great Depression, A Diary”, you will find that almost nobody got the 1937 “extreme” right, probably because the 1937 extreme was way below the 1929 extreme. And on a 10-year cyclical-adjusted P/E basis the 1937 extreme was exactly where we find ourselves today! I don’t mean to say the stock market will decline in 2013. Actually, I don’t believe that! Instead, it will probably still go up, like Mr. Tepper believes! Maybe a lot! What, on the other hand, I want to say is that to get only the extremes right is very much difficult. Sir John Templeton didn’t believe he was able to do that. Remember Mr. Graham who has said: “anyone who wasn’t defensively positioned by 1925 would have been wiped out during the 1929 crash!”. Or something like that… Mr. John Hussman keeps saying the market is in the worst 1% or 2% of all weekly observations in a century of data. Mr. Jeremy Grantham forecasts no return for US large caps and a negative return for US small caps for the next seven years… who really knows if we will get the chance to see even more extreme valuations? Remember 1968: valuations were not much higher than they are right now, S&P Composite P/E10 of 24 vs. a P/E10 of 22 today. And we know that on an inflation adjusted basis the market declined 63% from 1968 to 1982. I think it is very risky to call both a top and a bottom. Adjusting gradually, you might forfeit some gains, no doubt about that! But I think it is much easier and less risky to do. giofranchi

enoch01, I agree with you! And I am always in the stock market! It is just that I am not always 100% in it with my firm’s capital. As I have already written in this thread, Sir John Templeton’s “Yale Plan” still makes a lot of sense to me. And it is a very easy and actionable way to “follow the pendulum”, like Mr. Marks is used to saying. First, I want to know how much stock market exposure is reasonable and safe, then, with the capital I have decided to keep invested in the stock market, I look for bargains. Furthermore, I do not believe only in the extremes. Anyone who has studied Sir John Templeton knows he advocated a gradual shift from stocks to bonds + cash, when general stock prices were increasing, and a gradual shift from bonds + cash to stocks, when general stock prices were declining. Because he never believed a second neither in speculation nor in forecasting. giofranchi

The Baupost Group on the morality of the Fed Fortunately, my firm also generates fcf that I can go on investing, whatever happens to the stock market. But, its yearly fcf is just 12% to 15% the capital I have invested in the stock market. I believe my firm’s investments will do significantly better than the market, should any correction come. But a 30% decline in general prices would anyway mean that the fcf generated by the work and efforts of an entire year will be wiped out… Not so sure my partners will enjoy the ride… giofranchi The_Baupost_Group_on_the_Fed.pdf

And sometimes the obvious needs to be bolded :) If the market being high is followed by a general decline in prices, do you still believe the rebound in the housing and auto sectors will be unaffected? giofranchi

Dish Network Corp., Icahn Enterprises, and The Howard Huges Corporation. giofranchi Dormant_Assets_December_2012.pdf