giofranchi

PlanMaestro, thank you very much for posting this: a lot of food for thought! If I have understood properly what Mr. Tepper is saying, he believes the stock market is cheap, because of all the money the Fed is going on printing, and because it is keeping interest rates at zero. Now, let’s go back a second to Sir John Templeton’s “Yale Plan”: the variations he advised to a typical 60 percent program are summarized in the following table: 6th zone above stock market normal: 10% maximum in stocks 5th zone above stock market normal: 20% maximum in stocks 4th zone above stock market normal: 30% maximum in stocks 3rd zone above stock market normal: 40% maximum in stocks 2nd zone above stock market normal: 50% maximum in stocks 1st zone above stock market normal: 60% maximum in stocks Stock market normal zone: No change necessary 1st zone below stock market normal: 60% minimum in stocks 2nd zone below stock market normal: 70% minimum in stocks 3rd zone below stock market normal: 80% minimum in stocks 4th zone below stock market normal: 90% minimum in stocks 5th zone below stock market normal: Fully invested in stocks So, now let’s look at the graph in attachment: it seems that right now the valuation of the stock market is in its 80th percentile. Which is like saying the stock market right now is in the 4th zone above a normal valuation: 30% maximum in stocks. At least that’s what history suggests. Of course, it might be possible the Fed will succeed in making history irrelevant. But it surely takes Mr. Tepper, a much better investor than I am, to make such a call! It is extremely difficult for lesser investors, like myself, to play the Fed game and, in doing so, muster the confidence to disregard history! I think the “Yale Plan” is simple, straightforward, actionable, and will ultimately lead to at least a moderate amount of success. Instead, playing the Fed game is fraught with difficulties and uncertainties, even if it might give you the chance to book much larger profits. I really would like to know what you think about this. Thank you again, giofranchi

+1 And in that vein I would like to attach a very basic paper by Mr. John Hussman, but one that I always reread with great pleasure: “The Two Essential Elements of Wealth Accumulation”. May everybody on this board accumulate a lot of wealth during their lifetimes, not just as a goal by itself, but as the outcome of a journey of constant self-improvement and of the attainment of ever deeper knowledge. giofranchi The_Two_Essential_Elements_of_Wealth_Accumulation.pdf

Bill Gross on "Strawberry Fields - Forever?", and Charles Gave on "The Control Engineers and the Notion of Risk". giofranchi OTB121215_2.pdf

BCG on "Ending the Era of Ponzi Finance". giofranchi BCG_Ending_the_Era_of_Ponzi_Finance_Jan_2013.pdf

Sportgamma, I agree with all you have written. And I really think you have done your homework on Exor remarkably well, and it will surely turn out to be a great investment! ;) Cheers! giofranchi

Hi Sportgamma, it is always a pleasure to exchange ideas with you, as with many others on this wonderful board. Thank you all! But I don’t look at the operating companies at all! I like LUK and LMCA, and a few other companies, because they are in the business of “buying $1 dollar bills for 50 cents”, without all the weaknesses inherently embedded in the mutual or hedge fund business model. And, among all the endeavours of mankind “to buy $1 dollar bills for 50 cents”, as far as I know, will be the safest way to accumulate wealth for a very long time to come. Because, to paraphrase Mr. Taleb, it is the most anti-fragile business I know of. From page 67 of “Antifragile: Things That Gain from Disorder”: “Consider, as a thought experiment, the situation of an immortal organism, one that is built without an expiration date. To survive, it would need to be completely fit for all possible random events that can take place in the environment, all future random events. By some nasty property, a random event is, well, random. It does not advertise its arrival ahead of time, allowing the organism to prepare and make adjustments to sustain shocks. For an immortal organism, pre-adaptation for all such events would be a necessity. When a random event happens, it is already too late to react, so the organism should be prepared to withstand the shock, or say goodbye. We saw that our bodies overshoot a bit in response to stressors, but this remains highly insufficient; they still can’t see the future. They can prepare for the next war, but not win it. Post-event adaptation, no matter how fast, would always be a bit late. To satisfy the conditions for such immortality, the organisms need to predict the future with perfection – near perfection is not enough. But by letting the organism go one lifespan at a time, with modifications between successive generations, nature does not need to predict future conditions beyond the extremely vague idea of which direction things should be heading. Actually, even a vague direction is not necessary. Every random event will bring its own antidote in the form of ecological variation. It is as if nature changed itself at every step and modified its strategy every instant.” That’s exactly my idea: Coca-Cola, or any other business that has been very successful for a very long time, is striving to become the “immortal organism”, the business of “buying $1 dollar bills for 50 cents”, instead, is “nature”. Of course, even nature itself isn’t immortal, and it might come a time when no more bargains will be there to be found… but, sincerely, I think it will possibly be my grand-grand-nephew’s problem! It is kind of funny that, when I worry about how long Mr. Buffett will be at the helm of BRK, the most common response is the following: “we will deal with the succession problem 10 years from now!”. And Mr. Buffett is 82. Now, Mr. Malone, instead, is just 71… why should he leave Liberty Media anytime soon?! In the article I read yesterday I found this most amazing feat: “Liberty made more than a half billion dollars in loans to Sirius XM nearly four years ago. Taking advantage of Sirius XM's immediate need to refinance debt in a very tight credit market, Liberty was able to earn 15% interest on the loans. In addition to the high interest rate, Liberty was also able to buy a 40% equity stake in Sirius XM for $12,500. The investment also granted Liberty the authority to approve cash certain expenditures in excess of $10 million. That $12,500 investment is currently worth more than $7 billion at current Sirius XM share prices of $2.75-$2.80.” Some time ago I read “The Greatest Trade Ever” about Mr. John Paulson. Well, that book must certainly be rewritten, because no one ever created so much value as Mr. Malone has done with Sirius XM! If the numbers are true, and I have no way to ascertain that, Mr. Malone is in the business of “buying $1 bills for… 0.00018 cents”!! And that was just 4 years ago! My assumptions regarding Liberty Media: Mr. Malone will lead us for the next 10 years, and he is right now at the very top of his game. Of course, my assumptions could be proven wrong today, or tomorrow: “When the facts change, I change my mind. What do you do, sir?” Keynes. One last thought about Exor: their largest investment by far is FIAT. I don’t know how they operate, but I doubt they invested in FIAT opportunistically… They will surely be in FIAT as long as FIAT exists. FIAT right now might be a fantastic trading opportunity, but do you really think it is a good long-term holding? To jump into FIAT, when it is dramatically undervalued, and then get out, when its share price approaches fair value, might be a very rewarding use of capital. But that’s not what they are going to do. giofranchi

Very funny!! ;D …But too pessimistic! I don’t believe that is true at all. Vice versa, I see a bright future for the US. :) Cheers! giofranchi

Thank you ASTA! I know that Bestinver has a meaningful position in Exor. I will look for the interview on their website. It seems you have already done your homework on Exor: can you tell me their track record on a 5, 10, and 15 years basis? I have checked very quickly, and all I could find was the increase in NAV during the past 3 years. Not enough for me! Also because the management team seems relatively new, and therefore unproved (Enrico Vellano became CFO in 2006, Alessandro Nasi became Vice President of Business Development of CNH in 2008, and Mario Bonaccorso joined Exor in 2007). If I cannot project earnings at least 5 years into the future, with some sort of confidence, I almost never invest. Even if the price looks very cheap. giofranchi How would you project earnings for the next 5 years at Liberty Media or Leucadia for that matter? When you value Exor, the weight should go to analyse how they manage value (Gio, I also recommend that you read Valuation, Measuring and Managing the value of companies, by McKinsey CG). In regards to management, I would put more weight into J. Elkann and S. Marchionne as they are truly the ones in charge. Elkann has been on the board of Fiat since he was 21 years old (he is an engineer, such as yourself Gio). I don´t think I have seen an Xth generation (I think 4th in his case) descendant in a family business who is as competent as him. He also seems to be have a very humble personality (there is an anecdote about him working at a Fiat factory in Birmingham and even the family he stayed with were unaware of his family background). A few points: 1. Take a look at the transactions and structural changes that Elkann and Marchionne have implemented after they took charge and form an opinion on the quality of their decisions for Exor shareholders. Look at the spin-offs, the acquisitions, buybacks and simplification of capital structure. 2. Giovanni Agnelli & C. owns 59% of ordinary shares and 39% of preferred shares in Exor and J. Elkann has managed to gain total control of Giovanni Agnelli & C. Ask yourself if the fortunes of J. Elkann is aligned with the rest of the Exor shareholders. 3. Compare what Fiat has done since 2008 with, for example, Pegout. 4. Take a look at Fiat, Fiat Industrial, SGS and C&W. You could look at the track records on a 5, 10, and 15 years basis. You can also review S. Marchionne´s 5 year plan for Fiat and what the expected price per share should be if they accomplish 70% of their goals and look at how sensitive it is to scale efficiencies. 5. Look at the valuation and think about what you find to be the appropriate corporate discount for Exor. Thank you Sportgamma, actually I have read “Valuation”, among many other books about valuation. However, with the only possible exceptions of “Accounting for Value” by prof. Penman, and “Value Investing” by prof. Greenwald, I find all those books on valuation to be intellectually very interesting, but practically of little help. The reason is that I almost never try to value a company: instead, I am only interested in coming up with a conservative figure for what might possibly be the return on my investment for the next 10 years. And that is never easy, of course, but, as far as Liberty Media and Leucadia are concerned, I am quite comfortable with my assumptions. They are based on an extended and well-documented track-record, with a management that could go on performing very well for the next 10 years. Most important of all, I think I understand what the management of both Liberty Media and Leucadia did in the past, and what they are still doing today. It is this “understanding” that gives me the required confidence to partner with them, even more than their historical track-record. Not so with Exor… not even close! When I asked Christopher1 what he thought about Exor, he answered: “I rarely invest in Italian companies… I have seen too many bad things happen in the past…”. I couldn’t agree more! That being said, I really do not have an opinion regarding Exor. I don’t know the company and I don’t know its management. I know that almost everyone on this board boos Mr. Biglari, but I think that in his latest letter he wrote at least one thing that can be appreciated: "Our approach to purchasing stocks is to concentrate capital into very few concerns. We focus our attention and capital in an attempt to increase returns yet concomitantly reduce investment risk. Therefore, we limit our appraisals and allocations to businesses we can rationally assess, immersing ourselves in understanding a business rather than attempting to study many shallowly. As a consequence, our range of investments may be narrow, but within it we must be supreme. Analysis that is a mile wide and an inch deep is fool’s gold." Likewise, I don’t pretend to know every bargain that is available (Exor trading at 0.5 x NAV might certainly be a very good bargain!). What I am positive about is that I prefer to know Liberty Media and Leucadia well, then to know Liberty Media, Leucadia, Exor, etc. approximately. giofranchi

Mr. Ray Dalio on ValueWalk: http://www.valuewalk.com/2012/12/ray-dalios-bearish-2013-outlook-austerity-coming-qe-losing-efficacy/ giofranchi

The latest presentation from Mr. Gundlach: http://www.docstoc.com/docs/138374979/12-11-12-To-Catch-A-Thief-webcast-Slides---FINAL giofranchi

New article about Sirius and Liberty Media on Seeking Alpha: http://seekingalpha.com/article/1056331-how-many-sirius-xm-shares-will-liberty-media-sell?source=feed giofranchi

Well, what you pointed out is recent share price performance. And actually it seems to have been not bad, but neither stellar. Return on invested capital, on the contrary, looks very good to me: Onex Partners I, 2003-2006, Net IRR = 39%, Onex Partners II, 2006-2008, Net IRR = 11%, ONCAP I, 1999-2005, Net IRR = 33%, ONCAP II, 2005-2011, Net IRR = 12% From the notes: Net IRR is based on total investments and represents returns earned by third-party Limited Partners in the Funds after payment of performance fees, management fees and expenses. Those are recent results and look very good to me. Furthermore, OCX Proprietary Capital per Share increased 16% in 2009 and 17% in 2010, both exceeding their 15% stated goal. giofranchi

Well, AP, your answers ARE my analysis!! ;D They were very clear and useful! Thank you for sharing your knowledge with us and congratulations for your successful investment in Onex! giofranchi

Started reading it today (actually, listening to its audiobook). I enjoyed both "Fooled by Randomness" and "The Black Swan". Hope this one is as good as the first two! :) giofranchi

I generally don’t like to see much debt on the balance sheet of a P&C insurance company. Like you said, I think that good insurance companies can borrow money (gather float) trough their operations at very cheap rates. Great insurance companies can even borrow money for free! That’s one important advantage (among many) they enjoy on other money management vehicles. Why then pile up debt, on which they must pay substantial interests? A little debt might be justifiable, but I would like to see it remain a relatively small percentage of equity. giofranchi

AP, thank you very much and welcome to the board! This board is just great: when I don’t know something, and it happens very often, I only have to ask, and someone, who is much more knowledgeable than me, answers!! :) So, I will take advantage of it, and ask you some more questions: 1) Do you share Frank’s doubt that they might be reporting an inflated value of proprietary capital? Or do you think that management is honest and trustworthy? 2) From 1984 until 2000 proprietary capital showed a gross IRR of 27%: do you know what growth in NAV/share it translated into? I understand that salaries and bonuses might take away a big chunk, but it is hard for me to believe that, after achieving a 27% gross IRR, NAV/share hasn’t at least increased in between 15% and 20% annually… Am I being too naïve here? Could salaries and bonuses really amount to so much money?! ??? 3) I understand that the comparison with FFH’s portfolio of investments might not be applicable. But what about Mr. Buffett? It has been many years now that he is much more interested in “big elephants” than the stock market. And he constantly looks for private businesses to purchase. Can we make the argument that, among private businesses, Onex’s universe is larger that Mr. Buffett’s (because they are dealing with much less capital), and therefore their task is easier? 4) Finally, on succession: has Mr. Schwartz ever communicated his plans to shareholders? Do you see him retiring soon? If that were the case, is there someone younger, who has already proven himself, and who could replace Mr. Schwartz at the helm of Onex? Thank you again! giofranchi

Of course, compensation might be an issue. But the 15% yearly increase in Proprietary Capital per Share surely is after fees. At least judging from page 6 (short-term track record) and page 21 (long-term track record) of the presentation, results seem to have been quite consistent, if not predictable. Anyway, I am just beginning to read and study about ONEX. ubuy2wron, you seem to already know the company quite well: do you think it is worthwhile on my part spending some time to understand it better? Thank you, giofranchi

Onex is trading at Proprietary Capital per Share. It is always surprising to me that a company, whose stated goal is to increase Proprietary Capital per Share in excess of 15% per year (see the presentation), might actually trade at Proprietary Capital per Share. What am I missing here? Let’s see: 1) It might be that Onex is over-promising. But this certainly doesn’t seem to be the case: under the expert lead of Mr. Gerald W. Schwartz, its founder, Chairman, and CEO, Onex has produced a 29% IRR since inception in 1984. Now, take a look at slide n.20 of the presentation: usually, they are 75% invested and keep 25% in cash. A 29% IRR, therefore, generated a 22% yearly increase in Proprietary Capital per Share. So, they are actually under-promising, if compared to their historical track-record. 2) Ok, a track-record is not enough: it might have been just plain good luck (not very likely, because it is tough to be sustained only by luck for 28 years!), or it might be an obsolete way of doing business, one that cannot hope to replicate the same good results in the future. Well, this doesn’t seem to be the case either. Please, take a look at slide n.22 of the presentation: Proven and Sustainable Process, Disciplined Investing (Value mindset, Strong franchises) + Active Ownership. What’s not to like about it? 3) By now they might be working with too much capital. Proprietary Capital is $4.8 billion and AUM are $15 billion: while certainly not a small amount of money, it is comparable to the $24 billion portfolio of FFH, and it is not even close to what Mr. Buffett has to manage. 4) Maybe the outstanding manager who founded the company and made it grow is leaving soon, and so results will inevitably suffer. Mr. Schwartz is 71 and, even though no longer young, could certainly go on leading Onex for the next 10 years. If someone knows Onex well and has followed this company for some time, I ask you again: what am I missing here? Why is the market giving me the opportunity to partner with Mr. Schwartz at Proprietary Value per Share, when there is much evidence of the fact that he will be able to make it grow at a rate that exceeds 15% per year long term? In other words, why is the market giving me the opportunity to lock in a 15% CAGR of my hypothetical investment in Onex for the foreseeable future (next 10 years)? Thank you very much in advance. Link to the presentation: http://www.onex.com/Assets/Downloads/2012%20Onex%20Investor%20Day%20Presentation.pdf giofranchi

Well, I cannot argue with that! … On the contrary, I fear I sound like an idiot, when I try to share my thoughts in English with you! :( Although all my reading nowadays actually is in English, it will never be my mother language… I don’t really think an entrepreneur should necessarily be the founder of a company. Look no further than Mr. Henry Singleton, as an example from the recent past, or Mr. John Malone, as an example of today. They both acquired the great majority of their companies, but also implemented the right strategies to make those companies more profitable, and to make them grow. Many a time they were also directly involved in supervising the daily operations of those companies. They understood which changes were desirable, and had the strength and the perseverance to carry them out. As far as I know, they both should be reckoned examples of great entrepreneurs. giofranchi

Very sound advice! Thank you, txitxo and hellsten (the bag of chocolate or fruit part is also much fun! ;D ) giofranchi

Sincerely, I wish I were so much of an idiot as Mr. Biglari is!! ;D Last year he increased investments 50%, BV per share 25%, investments grew from $6.9 million in 2008 to $378.6 million in 2012, SNS customer traffic is continuing to improve (albeit at a slower pace), and operating earnings per store are continuing to increase handsomely, the pursuing of the SNS franchising is also bearing fruits, with the first 40 international restaurants to open next year throughout the United Arab Emirates. No, to me he doesn’t sound like an idiot at all… Instead, he most certainly sounds like a bragging, arrogant, and overconfident entrepreneur… But here, of course, we must once again remember the difference between investors and entrepreneurs: the most successful investors tend to be intellectuals, very deep thinkers, while the most successful entrepreneurs tend to be… well, bragging, arrogant, and overconfident! Their bragging, arrogance, and overconfidence stems directly from all the energy and unrelenting persistence they put in each effort of theirs, and, consequently, from all the outstanding goals they achieve. The problem is that most entrepreneurs are fooled into thinking that energy and unrelenting persistence are all that really matters… So, they overlook culture, and most often remain ignorant and unsophisticated… Now, say what you want about Mr. Biglari, but I think nobody can label him as “ignorant” or “unsophisticated”. Instead, put together knowledge with energy and unrelenting persistence, and what you get is a hell of a businessman! That being said, I must admit that my judgment of Mr. Biglari might not be entirely rational… Mr. Biglari has created the “platform” that best resembles what I am also trying to do with my own firm. And, maybe, sometimes I unconsciously think: “If he fails, operating on a much larger scale and being in a much safer position than me, why should I succeed instead?”. That is an irrational thought, I know. But no one is entirely rational all the times, right? :-[ giofranchi

Thank you, Oracle! :) giofranchi

Hello ASTA! Whoever invests and has real skin in the game knows that we are all dealing with uncertainty, because we are all dealing with the future, and nobody knows what the future might have in store for us! Right? So everyone’s view should be regarded and examined with the utmost respect. Arrogance doesn’t belong here! At least that’s my firm belief. Furthermore, your portfolio makes perfect sense! And, if I should make a guess, I would say that it will perform very well! Unfortunately, I have got a psychological restraint that doesn’t let me behave like a copycat investor 100%: I call it “the businessman negative bias towards what he doesn’t understand”. :( I like to partner with Mr. Watsa, but I would never invest in RIM, just because Mr. Watsa did so. I like to partner with Mr. Einhorn, but I would never invest in GM, just because Mr. Einhorn did so. I like to partner with Mr. Malone, but I would never invest in Sirius, just because Mr. Malone did so. Etc. Why? Because I think I can forecast with a sufficient degree of confidence what the annual return on my firm’s investment in FFH might be for the next 10 years. The same is true for GLRE and LMCA. On the contrary, I have no clue about RIM’s, GM’s, and Sirius’s long term future earnings. They are either beyond me (RIM and Sirius), or I know I have not done my homework (GM). Same thing applies to BAC: I understand and I truly believe that BAC is “statistically” very cheap, but I have not really done any due diligence on BAC, so I am psychologically frozen, and I cannot invest… It surely is a weakness of mine! Thank you for the link to the interview about Exor. And I hope you don’t mind me having answered to your message publicly. You should write more frequently on the board! ;) Best regards, giofranchi

Thank you ASTA! I know that Bestinver has a meaningful position in Exor. I will look for the interview on their website. It seems you have already done your homework on Exor: can you tell me their track record on a 5, 10, and 15 years basis? I have checked very quickly, and all I could find was the increase in NAV during the past 3 years. Not enough for me! Also because the management team seems relatively new, and therefore unproved (Enrico Vellano became CFO in 2006, Alessandro Nasi became Vice President of Business Development of CNH in 2008, and Mario Bonaccorso joined Exor in 2007). If I cannot project earnings at least 5 years into the future, with some sort of confidence, I almost never invest. Even if the price looks very cheap. giofranchi

Charles Gave on Cuckoo times. giofranchi Daily+12.7.12.pdf