giofranchi

For anyone who might be interested. giofranchi Daily+10.1.12.pdf

Not really! I don’t believe Mr. Hussman either thinks of himself as a “macro” investor. I think he calls himself a “value” investor. Of course, he has developed his own way of value investing. Just like any great investor, Mr. Hussman doesn’t subscribe to any standard way of investing. Instead, he has found what really works for him, and what fits his personality the most. I guess he recognizes that a lot of our investments are in public companies, and not in private enterprises. Public companies are subject to two kind of risks: business specific risk and market risk. 90% of the time you can think only about the former and completely forget about the latter. But the rest 10% of the time you’d better be aware of both. And today we find ourselves in that rare and perilous 10%. He certainly might be wrong, but there are a lot of things in his analysis that I like and I agree with. giofranchi

Our economic challenges will be addressed in time, but they are likely to involve much greater restructuring and much slower progress on deficit reduction than the capital markets seem to contemplate. Europe will solve its problems, but most likely through a departure of stronger countries from the Euro, followed by a combination of aggressive restructuring and monetization. We will get through all of this, and both the economy and the financial markets will do fine in the longer-term, but to imagine that there will not first be major challenges and disruptions is a leap of faith – and a leap over a century of economic and financial history that screams otherwise. John P. Hussman, October 1, 2012 giofranchi

twacowfca, great analysis of BRK! AmEx, Wells Fargo, Coke… a 7% earnings yield, add the benefit of float and you get a 10% earnings yield, pick up occasionally some unusual bargain and you compound at 11% to 12%… It looks easy! So why isn’t it copied more often? You know that I am thinking hard about LRE: why an outstanding (unique, I daresay!) underwriter like LRE keeps the large part of its investments in short-term bonds, instead of just copying what Mr. Buffett has shown works so well? I don’t understand: Mr. Brindle could very well go on concentrating exclusively on the underwriting business - as he should do, because that is clearly what he does best -… but why don’t hire YOU??!! ;) If only with the goal to replicate what you have written about BRK’s way of investing! It doesn’t take Mr. Buffett to do that! If the reason is: it works for BRK, because of Mr. Buffett’s skills; well, then I don’t agree. I just don’t see how Mr. Buffett’s unique investing skills should be required, to achieve good results the way you have so clearly described. giofranchi Giofranchi, you ask a great question: Why doesn't Brindle, who is arguably the best property underwriter in the Bermuda / Lloyds markets invest his float in great businesses the way Buffett does? The short answer is that he has had a top tier record investing in equities in the past, but what he does now is much better for LRE's business. BRK had a AAA rating until Warren's put derivatives went against him in 2008 and led to a downgrade as the market value of BRK's stocks also declined. However, this had little downside because BRK was still one of the most solid companies in the world. LRE liquidated their equity portfolio in mid 2008 before the stock market tanked to avoid such a possible consequence, because the prospect of a downgrade from A - to below investment grade would have been disagreeable to say the least. LRE was one of the few insurers to have positive investment returns in 2008, and in every quarter of their existence except one. Lancashire is a short tail property insurer. This necessitates carrying mostly high quality, short duration liquid assets to be able to pay claims quickly if there should be a large claim. This limits investment returns, but it also gives them the huge optionality that goes with carrying a lot of cash and near cash. For example, they were able to buy back about 25% of their stock a few years ago at a price that averaged less than book value. That's the gift that keeps on giving. Recently, their extra cash has enabled them to leverage their sterling reputation to goose returns through sidecars. Here's how the economics of a sidecar works for them: their long term return on equity at LRE has averaged 19%+. Brindle's returns for the syndicates that he and Charmin managed at Lloyds also returned 19%+ on average. All of these returns have been without a single down year, quite low volatility considering that their peers had a very rough time at Lloyd's in the 80's and 90's. Therefore, it's reasonable to assume that the central value of LRE's returns will continue to be about 19%+ per annum or perhaps a little better with the way they get more upside with less downside in the sidecars. LRE puts a relatively small amount of capital into a sidecar and other investors fund the rest. LRE gets a commission and a management fee for managing the sidecar. This attenuates the downside to their investment in the sidecar if there is a loss. They also cede some of their most catastrophe exposed business to the sidecar. This also attenuated the downside from a large catastrophe to their regular business. Then, if the loss experience of the sidecar is low, LRE will be entitled to a percentage of the profit of the entire sidecar above the profit of their investment in it. Lets assume that the long term expectation of LRE's investment in the risk assumed by the sidecar sidecar would be greater than their long term average return of 19%+ because sidecars are are only set up when rates in a particular sector are exceptionally high. However, Lancashire limits how much catastrophe exposure it is willing to take on even though their expectation is that the return would be great if they took on more risk. Let's assume that the long term average expectation of the annual profit of the sidecar is about 20% for the outside investors. LRE's expected return on the sidecar may be perhaps 30%+ because of their overrides. Plus the risk is far less than if they had retained a higher level of catastrophe exposed business. :) That return on extra cash not needed in their core business is a lot more than what Lancashire would expect to get from an investment in common stocks. However BRK's business is much more long tail. There is a long time available to invest the float until claims have to be paid. That's why having substantial investments in common stocks makes sense for BRK much more than for Lancashire. twacowfca, your knowledge of the insurance/reinsurance business is clearly deep and all-comprehensive. I really hope we all on this board could go on benefiting from it! :) giofranchi Thank you for the compliment, but without any false modesty, I can't accept it. If I have any insight about insurance businesses it is to realize how little I know. That's why who's in charge is so important. It's like the saying, "If you don't know diamonds, know your jeweler". For example, a few years ago, I was trying to understand the adequacy of FFH's asbestos reserves. Prem had taken initiative to strengthen those reserves which had proven to be inadequate in some of the companies he had bought. This reflected badly on the strength of the balance sheet, but very highly on Prem and his team as those strengthened reserves were better than most other insurers had reserved based on years of future estimated claims. The character of Prem and his team was much more important in my mind than the technical issue. Then, I looked at a letter Warren had sent to the SEC in response to an inquiry about how they approached the same reserving issue. It turned out that BRK had already reserved about 75% more than anyone else in the P&C universe for asbestos claims. In truth, I have no expertise in adequacy for such claims, but I do know that BRK and FFH are on my short list of companies I want to be a part owner of. :) You see?! Your answer is exactly what I was talking about!! ;D ;D giofranchi

shalab, I definitely put myself among the remaining 999! Surely, I am not half as smart as many on this board! ;) But on this I agree with you: even a dumb businessman/investor like myself could be twice as successful in the US, than he currently is in Italy! As much as I love my family and all the beautiful things in this country, I must admit that right now Italy is a mess. Even worse: we have no leadership credible enough to make things change for the better… :( ...We will see! giofranchi

txlaw, you most surely are right! But consider that for each “astronaut” (the person who really succeed in getting into orbit), there are at least 999 people who stay on earth… Those 999 left behind should be content to manage a business as effectively as possible, extract from it as much free cash as possible, and use it to buy high quality enterprises at good (or, when possible, very good!) prices. They will have a productive life, a rewarding career, and they will create wealth. The quote I liked the best from the book “American Gridlock”, which I have just finished reading, follows: The late Australian billionaire Kerry Packer put this to me better than any theorist ever has: “Woody, if you meet someone very successful who thinks he deserved his success, you know you have met a real jerk.” Bingo! giofranchi

twacowfca, great analysis of BRK! AmEx, Wells Fargo, Coke… a 7% earnings yield, add the benefit of float and you get a 10% earnings yield, pick up occasionally some unusual bargain and you compound at 11% to 12%… It looks easy! So why isn’t it copied more often? You know that I am thinking hard about LRE: why an outstanding (unique, I daresay!) underwriter like LRE keeps the large part of its investments in short-term bonds, instead of just copying what Mr. Buffett has shown works so well? I don’t understand: Mr. Brindle could very well go on concentrating exclusively on the underwriting business - as he should do, because that is clearly what he does best -… but why don’t hire YOU??!! ;) If only with the goal to replicate what you have written about BRK’s way of investing! It doesn’t take Mr. Buffett to do that! If the reason is: it works for BRK, because of Mr. Buffett’s skills; well, then I don’t agree. I just don’t see how Mr. Buffett’s unique investing skills should be required, to achieve good results the way you have so clearly described. giofranchi Giofranchi, you ask a great question: Why doesn't Brindle, who is arguably the best property underwriter in the Bermuda / Lloyds markets invest his float in great businesses the way Buffett does? The short answer is that he has had a top tier record investing in equities in the past, but what he does now is much better for LRE's business. BRK had a AAA rating until Warren's put derivatives went against him in 2008 and led to a downgrade as the market value of BRK's stocks also declined. However, this had little downside because BRK was still one of the most solid companies in the world. LRE liquidated their equity portfolio in mid 2008 before the stock market tanked to avoid such a possible consequence, because the prospect of a downgrade from A - to below investment grade would have been disagreeable to say the least. LRE was one of the few insurers to have positive investment returns in 2008, and in every quarter of their existence except one. Lancashire is a short tail property insurer. This necessitates carrying mostly high quality, short duration liquid assets to be able to pay claims quickly if there should be a large claim. This limits investment returns, but it also gives them the huge optionality that goes with carrying a lot of cash and near cash. For example, they were able to buy back about 25% of their stock a few years ago at a price that averaged less than book value. That's the gift that keeps on giving. Recently, their extra cash has enabled them to leverage their sterling reputation to goose returns through sidecars. Here's how the economics of a sidecar works for them: their long term return on equity at LRE has averaged 19%+. Brindle's returns for the syndicates that he and Charmin managed at Lloyds also returned 19%+ on average. All of these returns have been without a single down year, quite low volatility considering that their peers had a very rough time at Lloyd's in the 80's and 90's. Therefore, it's reasonable to assume that the central value of LRE's returns will continue to be about 19%+ per annum or perhaps a little better with the way they get more upside with less downside in the sidecars. LRE puts a relatively small amount of capital into a sidecar and other investors fund the rest. LRE gets a commission and a management fee for managing the sidecar. This attenuates the downside to their investment in the sidecar if there is a loss. They also cede some of their most catastrophe exposed business to the sidecar. This also attenuated the downside from a large catastrophe to their regular business. Then, if the loss experience of the sidecar is low, LRE will be entitled to a percentage of the profit of the entire sidecar above the profit of their investment in it. Lets assume that the long term expectation of LRE's investment in the risk assumed by the sidecar sidecar would be greater than their long term average return of 19%+ because sidecars are are only set up when rates in a particular sector are exceptionally high. However, Lancashire limits how much catastrophe exposure it is willing to take on even though their expectation is that the return would be great if they took on more risk. Let's assume that the long term average expectation of the annual profit of the sidecar is about 20% for the outside investors. LRE's expected return on the sidecar may be perhaps 30%+ because of their overrides. Plus the risk is far less than if they had retained a higher level of catastrophe exposed business. :) That return on extra cash not needed in their core business is a lot more than what Lancashire would expect to get from an investment in common stocks. However BRK's business is much more long tail. There is a long time available to invest the float until claims have to be paid. That's why having substantial investments in common stocks makes sense for BRK much more than for Lancashire. twacowfca, your knowledge of the insurance/reinsurance business is clearly deep and all-comprehensive. I really hope we all on this board could go on benefiting from it! :) giofranchi

Hey! Mr. Buffett is a genius! No doubt about it! But let’s take another example: Mr. Gayner of Markel Corp.. MKL has compounded book value per share at 17% annualised for the last 20 years. They clearly are good underwriters (although not as good as LRE!) and Mr. Gayner is a good value investor. But a genius?! I have been looking at what Mr. Gayner buys and sells for years now, and it doesn’t even seems to me that he strives to “pick up occasionally” those “unusual bargains” twacowfca has written about. I think that my question is legitimate, also because I heard Mr. Munger ask it many times before: why are so few those who try to emulate Berkshire business model? giofranchi

twacowfca, great analysis of BRK! AmEx, Wells Fargo, Coke… a 7% earnings yield, add the benefit of float and you get a 10% earnings yield, pick up occasionally some unusual bargain and you compound at 11% to 12%… It looks easy! So why isn’t it copied more often? You know that I am thinking hard about LRE: why an outstanding (unique, I daresay!) underwriter like LRE keeps the large part of its investments in short-term bonds, instead of just copying what Mr. Buffett has shown works so well? I don’t understand: Mr. Brindle could very well go on concentrating exclusively on the underwriting business - as he should do, because that is clearly what he does best -… but why don’t hire YOU??!! ;) If only with the goal to replicate what you have written about BRK’s way of investing! It doesn’t take Mr. Buffett to do that! If the reason is: it works for BRK, because of Mr. Buffett’s skills; well, then I don’t agree. I just don’t see how Mr. Buffett’s unique investing skills should be required, to achieve good results the way you have so clearly described. giofranchi

[amazonsearch]American Gridlock[/amazonsearch] Most of you probably have already read the book, so I won’t describe it in detail here. For those who haven’t, I just say that it is divided into 6 chapters: 1) Dialogue of the Deaf: a sort of “deep” introduction to Inductive Logic, 2) How to extricate ourselves from a Lost Decade, 3) How to resolve the longer-run entitlements spending crisis, 4) How to prevent future Perfect Storms in the financial markets, 5) How to negotiate more effectively with thugocracies (China), 6) How to confront the thorny issue of distributive justice in seeking to create a more ideal polity. I think it is a good book, that offers sensible solutions to all the aforementioned dilemmas. Anyway, there is a question that, imho, is left completely unanswered: in Chapter 4, Mr. Woody Brock shows that, in order to prevent future perfect storms in the financial markets, the most important variable, which can be controlled, is to keep the system from piling up excessive debt. And he shows how this could be accomplished. Ok, that’s fine! But, what about today?! See page 2 of the presentation in attachment: today Total Debt Outstanding as % GDP is 350% in the US and 450% in the EZ. The question that’s left unanswered is: how do we go back to a more sustainable 200% Total Debt / GDP? With GDP growing 1,5% - 2% in the coming years, growth does not seem to be the answer. So, how do we cut Total Debt almost by half? Unfortunately, Mr. Woody Brock offers no answer. This morning I have read an article by Mr. James Miller of the Ludwig von Mises Institute of Canada, and he reminded me of Mr. Mellon’s advice to President Hoover: “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate” instead of propping each industry up with tax dollar. This liquidation doctrine would “purge the rottenness out of the system” and make certain that “people will work harder” and “ live a more moral life.” giofranchi SIC12_Day1-4_Hunt-Lacy_Hoisington_Econ_presentation.pdf

For anyone who might be interested. giofranchi Speech_by_Lacy_Hunt.pdf

Posted by Zero Hedge: http://www.zerohedge.com/news/2012-09-26/fx-concepts-john-taylor-doesnt-see-cloudy-european-sky-becoming-clear?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29 giofranchi

Posted by Value Investing World Blog: http://www.valueinvestingworld.com/2012/09/bob-rodriguez-on-cnbc.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ValueInvestingWorld+%28Value+Investing+World%29 giofranchi

Actually, in the following interview, posted by Farnam Street, Mr. Lewis sounds quite skeptical that a true and lasting solution will be finally found… http://www.farnamstreetblog.com/2012/09/michael-lewis-on-interviewing-obama-and-the-euro-crisis/ giofranchi

Couldn't agree with you more! Anyway, I think that some recommendations of his could be useful also to good value investors. For instance, event-driven strategies are used by Mr. Loeb, who is undoubtedly a good value investor, and were also used in the past by Mr. Buffett; long/short strategies are used by both Mr. Watsa (hedging out market risk) and Mr. Einhorn, who are undoubtedly good value investors; and distressed debt strategies are used by both Mr. Marks and Mr. Klarman, who are undoubtedly good value investors. giofranchi

For anyone who might be interested. giofranchi Why_exit_is_an_option_for_Germany.pdf

For anyone who might be interested. giofranchi Sleepwalking_toward_a_precipice_partIII.pdf

For anyone who might be interested. giofranchi RGI_paper.pdf

txitxo, remember that you are talking to Americans and Canadians! They haven’t experienced a depression since the ‘30s!! But I am Italian, and you are Spanish: we know much better what depressions really are!!! ;D ;D ;D Ok, just joking! Anyway, I agree with all you have written. giofranchi

Of course, you are right tombgrt! But these things fluctuate! If you check just the year before (end of 2010), the 20 years CAGR in BV per share was 17,6%. At the end of 2009, it was surely even higher. Mr. Watsa is not dancing to the tune of the Central Banks of the world! So, right now we are suffering! It remains to see, if he and his team will be proven right or wrong: if they are right, returns will be satisfactory. No doubt about it. giofranchi

Yes, I agree MrB! And the first thing I pointed out is that Mr. Watsa stated goal is to compound book value at 15% annualized, far from what he achieved in the past. As racemize said, it could be even lower. Sincerely, I don’t know and I don’t even really care. I invest in businesses, because I like the business model, I like the management, and I like the price. Then, as they say, I let future returns take care of themselves. giofranchi

Well, of course you are right… as far as history is concerned! But, paraphrasing Mr. Buffett, if history were all there is about investing, librarians would be the richest people on earth. Past results are very important, far from me saying the contrary! But, they are not everything. You must also judge the business model, the management, and the price. Only then you can make a bet on the future! And I like what I see in FFH: I believe the opportunities to markedly improve their underwriting performance are there and will be exploited. Frank, do you really think you would be able to buy one of the best capital allocator out there at book value, if it were also the best underwriter?! No way, right? Think of it this way: on the underwriting front they have much room to “surprise” the market. And I see all the necessary premises in place, to achieve that: a great underwriting philosophy, a disciplined management, and troubles inherited from the past (see, for instance, Crum & Forster) that are constantly, albeit slowly, fading away. giofranchi I think its important to look at history to see what is capable. Especially in businesses like insurance/banking, their historical record matters. unless its a situation like AIG (or other) where a turnaround is the main theme I will not pay market value for the business. LUK, L are also in similar boats and as Palantir points out is trading for even less. EVERY insurance company talks about how their underwriting performance is safe, less risky, etc. Until I see evidence of this, I'm not going to assume and pay full value for it. Correct me if I am wrong but isn't the whole FFH record predicated on outsized investment returns? I think at the end of the day, most people aren't buying FFH for its insurance. its the ability of Prem that is problably keeping this company from trading at 0.8 book. I agree however that improvements in the insurance is likely a free option, but I rather get AIG (0.6 TBV) for an insurance turnaround story. Frank, I don’t invest in turnaround… FFH grew at an annualized rate of 23,5% since inception… AIG was bailed out by the US government just 4 years ago… I have not done my homework on AIG, so I cannot judge it (almost anybody on this board knows much more about AIG than me!), but I think I can agree with you, if you define AIG as a turnaround situation, while I could never agree with you, if you put FFH on the same level. If you think of how an insurance company increases shareholders equity, the following formula applies: T/S = (I/A)(1+R/S) + (U/P)(P/S) Define: T = Total after-tax return I = Investment gain (or loss) U = Underwriting profit (or loss) P = Premium income A = Total Assets R = Reserves & Other Liabilities S = Shareholders’ Equity T/S = Total Return on Equity (1 + R/S) is the “investment leverage factor”, while P/S is the “underwriting leverage factor”. For FFH, the “investment leverage factor” is more or less 2,2, while the “underwriting leverage factor” is less than 1… Anyone can understand why for almost any insurance and/or reinsurance company investment results are much more important than underwriting results (of course, there are the exceptions such as LRE…). So, FFH has a proven track record of being one of the shrewdest capital allocator out there, which is, as I hoped I have shown, the most relevant part of its business; while being an average underwriter, with good opportunities to become also an above average underwriter in the near future. Do you really want to call it a turnaround situation?! giofranchi

Yeah but, if you buy above book value, you will not get the benefit of investment returns....say BV is going to compound at 10% annually, but you buy at 1.1xBV, what's your return? For example, look at Loews, they're trading at a 20% discount to BV....and have similar growth record as FFH. Anyways this is outside my circle of competence...I'll stick to GOOG and PH. Palantir, I don’t think I understand your point… Mr. Watsa stated goal is to compound book value at 15% annualized. In the past he achieved a 23,5% annualized return since inception… If past results are indicative, maybe he will do better than 15% in the future! Anyway, if you by at 1,4 x book value in year 1, and the stock trades at 1,4 x book value in year 10, your annual return will be exactly 15% (or higher, if Mr. Watsa outperforms). Instead, if you buy at book value in year 1, and the stock trades at 1,4 book value in year 10, your annual return will be higher than 15%. What I meant is that a company like FFH, which grew at an annualized rate of 23,5% for more than 25 years, deserves to trade at 1,4 x book value. It’s “fair value” should be around 1,4 x book value. So, right now you are getting a substantial discount, and your margin of safety is meaningful. giofranchi

Well, of course you are right… as far as history is concerned! But, paraphrasing Mr. Buffett, if history were all there is about investing, librarians would be the richest people on earth. Past results are very important, far from me saying the contrary! But, they are not everything. You must also judge the business model, the management, and the price. Only then you can make a bet on the future! And I like what I see in FFH: I believe the opportunities to markedly improve their underwriting performance are there and will be exploited. Frank, do you really think you would be able to buy one of the best capital allocator out there at book value, if it were also the best underwriter?! No way, right? Think of it this way: on the underwriting front they have much room to “surprise” the market. And I see all the necessary premises in place, to achieve that: a great underwriting philosophy, a disciplined management, and troubles inherited from the past (see, for instance, Crum & Forster) that are constantly, albeit slowly, fading away. giofranchi

For anyone who might be interested. giofranchi IceCapAssetManagementLimitedGlobalMarkets_September_2012.pdf