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FFH vs. BRK vs. Loews - What is the best way to allocate capital?


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Question for discussion - what is the best way to allocate capital?

 

1) Buffett - buy entire companies, take cash from subsidiaries, receive better tax exclusion on dividends repatriated, stay decentralized overall.

 

2) Watsa - stay more with investments, less administrative burdens, perhaps less monitoring, more liquidity to move investments

 

3) Tisch and Loews - own controlling stakes, but keep investments publicly traded so FMV can be ascertained more easily.

 

Of course, I painted these 3 with a broad brush and they mix and match.  My personal opinion is that #1 is the best, but all 3 work for each company.  Just more theoritical and hoping for some interesting debate.

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Bronco, Power Corp/Power Financial do the same as Loews.  Their returns have been stellar for as long as anyone except Buffett.  Major holding is Great West; lesser holdings are IGM Financial; Pargesa (agglomeration of public and private European holdings.  They also keep a good handle on the downside.  PWF is one of my largest non FFH holdings.  They could easily take any of the subs private but have never even hinted at it.  I am not sure why they have chosen this method except perhaps it offers more chance to raise money via bonds and preferred shares.  It also allows their various CEOs to run somewhat autonomous operations - which decreases corner suite turnover.  Their turnover in management is very low.  Very smart operation.  One of the few companies I am willing to hold in my RRSP accounts.  

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Uccmal - that is a new one for me, thanks.

 

I know the Tisches spun 50% of Diamond Offshore where the proceeds paid for the basis, so they are playing with the house's money per se.  But it is interesting (at least to me) the different approaches.  I know Buffett favors 100% ownership, but obviously this can't / won't happen all the time.

 

 

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I think each has different risk/reward characteristics.

 

1. More scalable but much lower returns. You get what the business earns and nothing more, other than a one time boost from price/value convergence. So would not expect more than 10% over the long term from these kinds of investments, which would be pretty good if funding source is low cost float. Risk is arguably lower as management has full control over the affiliate.

 

2. Much less scalable but with higher returns.

 

3. I think this would be good for those investor-owners (Tisch's) who are reasonably competent but not super-investors. Otherwise if you are really good, you do not need Mr Market to validate your investments for you by keeping some of it public.

 

Vinod

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Bronco, Power Corp/Power Financial do the same as Loews.  Their returns have been stellar for as long as anyone except Buffett.  Major holding is Great West; lesser holdings are IGM Financial; Pargesa (agglomeration of public and private European holdings.  They also keep a good handle on the downside.  PWF is one of my largest non FFH holdings.  They could easily take any of the subs private but have never even hinted at it.  I am not sure why they have chosen this method except perhaps it offers more chance to raise money via bonds and preferred shares.  It also allows their various CEOs to run somewhat autonomous operations - which decreases corner suite turnover.  Their turnover in management is very low.  Very smart operation.  One of the few companies I am willing to hold in my RRSP accounts.  

 

Thanks for flagging this out.

 

Vinod

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Vinod - don't disagree with you on anything.

 

I think BRK is still interesting from this perspective - company will be doing bigger and bigger deals.  I still predict the next big deal is in the energy/utility space. 

 

I also think WEB wants Mars. 

 

Thanks for the comments so far.

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I don't have all the answers to this question but one thing I strongly believe is that model #3 is absolutely the worst of all possible worlds. Owning 90% of a large subsidiary and floating 10% seems destined to lead to perpetual undervaluation. As a stepping stone to divestment of the majority control I can understand but the idea that you do it so you can get a public valuation for something you own 90% of is just idiotic.

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mranski, I have PWF in both cash and RRSP, but is my second largest holding in RRSPs.  A couple of past blowups in the RRSP have left me leery of anything that does not have a very high level of safety.  I figure that PWF/POW are as close as you can get to risk elimination (stock wise).  PWF and FFH have been replacements for NB.  I like the dividend in the RRSP as it guarantees some growth even in down years.  I recently started putting FFH coming in as well as the company has become more of a fortress of capital.  

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If we are talking about entities of a modest size, then I would go with choice 1 all the time, assuming you could buy great businesses. 

 

Because if you can buy a great business that earns high returns on capital, that has room for growth, and where you can allocate excess cash that flows into your coffers as you see fit to other business or investments, that seems to be the best of all worlds.   

 

In other words, if BRK were the same size as FFH or smaller, I'd go with Berkshire every time, knowing full well that many of the businesses WEB would buy would be float-oriented businesses.

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I agree.  But still not sure why buffet is never imitated.

 

You can answer this question if you inverted the question. What would it take to imitate Buffett?

 

1. You compound capital at a phenomenal rate. His partnership returned 25.3% for 11 years after fees from 1957 to 1968.

2. You have a phenomenal ability to judge and manage people - in all of Buffett's tenure, not even a single manager has left to work for competition. People have retired, been forced out or have died on the job.

3. The people you are associated with are in a league of their own and stand apart from others in the business world - e.g: Charlie Munger; a person whose breadth and depth are both astonishing. ( ala "poor charlie almanack" ). Then there are others such as David Sokol, Tony Nicely, Ajit Jain et. al...

4. Finally, in the money business, integrity is the most important asset - his integrity (and wisdom) is unparalled.

 

Now take any company and apply these checks. You can see for yourself where different companies stack up - e.g: Sardar Biglari

 

 

That about sums it up.  He is certainly imitated, probably daily, but not on the scale he operates.

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  • 2 months later...

Write ups on desmairis + Power financial + Power Corp. Never saw these before. Original article written in summer of 2009

 

"Who Is The Warren Buffett Of Canada? Prem Watsa Of Fairfax Financial (FFH)? Or Paul Desmarais Of Power Corporation Of Canada (POW)?"

http://www.gurufocus.com/news.php?id=116068

 

"Buffett Loses to Desmarais as Power Exceeds Return"    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=am2tdSNHYLK4

 

         

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I don't know one executive that imitates him.  Focus on float from day 1.  Benefitting from opm more than anyone in world history.  Flat org structure.  No options.  No rsu's.  Low CEO salary.  Buying private businesses as first choice. Allocation of capital to best source any business.  No buybacks. No dividends.  30 people in the parent company.  I would say no one comes remotely close in trying to imitate him.

 

People think Buffett bought coke and geico and proctor and gamble and in there lies the secret.

 

Okay........whatever.

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Txlaw - I agree.  But still not sure why buffet is never imitated. 

 

Perhaps as a model it's more lucrative for a person of such talents to be a hedge fund manager?

 

It looks like Sardar couldn't hack it... managing other shareholders' investments for free that is.  It sure didn't take him long to get his hands into their collective cookie jar.

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Shane - I am flattered that you think I should have my ticker symbol - that makes two of us.

 

However, and unfortunately, the NYSE has not granted me my own symbol.  Perhaps others on the board can petition and we can take this to Duncan.

 

Truth be told, Bronco is simply nothing more than a handle for a good looking poster on this message board who roots for the worst GD football team since the Buc's with Vinny and Steve Young.

 

 

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