giofranchi Posted July 28, 2013 Author Share Posted July 28, 2013 Mr. Buffett once said that he believes part of his outperformance can be attributed to not having lived through the Great Depression. Specifically not having invested during that time. It changes a man. I wonder how much of the macro tourism that we see currently from self-avowed value investors is attributed to the simple fact that living and investing through the 2008-2009 correction has a serious psychological effect on some people. (Not directed at anyone in particular. Just an observation.) merkhet, that’s why I invest in FFH: because they were hedged before 2008, not after! ;) BTW, I just wanted to make one more thing very clear: each situation is unique. I hate rules, because they are very impractical. If you follow rules, most of the times you end up lacking the flexibility that is required, to make the best decisions. Take my case, for instance: during the last 3 years I have kept a 30% investment in FFH and a 30% in cash. Yet, I have succeeded in increasing my firm’s BV at 17% annual. How is it possible? Because my firm, thanks God!, generates operating earnings. And those earnings at the end of each year were taxed, then summed to my firm’s equity. (I also paid out some dividends! :) ) I know that, as my firm’s equity gets larger and larger, those operating earnings will contribute less and less. People sometimes argue: in 1996 the S&P500 already was as expensive as it is today, then it shot up for 4 straight years, before a correction finally arrived. So, whoever is hedged or hold large sum of cash today might run the risk of waiting for a long time! Imo, the comparison is clearly fallacious: from 1996 to 2000 the S&P500 behavior ceased to be representative of the US stock market. Technology and Media stocks shot up, distorting the behavior of the whole index, while a lot of other sectors were left in the dust. Today instead, as it were in 2007, the advance is much broader. So, imo the comparison with the 2000 peak is another generalization and is misleading. But, let’s assume vice versa that it is a sound comparison: then, what should be the most likely scenario for my firm? Very low returns from investments for the next 4 years… but we don’t need them! Because during that time operating earning will still be meaningful enough to help us achieve our goal of a 15% CAGR in BV. Then what? Well, if the market keeps marching upward for another 4 years, like it has been doing for a while now, I am almost sure even Packer, Kraven, and others will get scared… and rightly so: because it will then be the most spectacular stock market bubble in human history all over again!! And a needle to prick that gigantic bubble will be just around the corner! Then, exactly when my firm’s equity has increased so much, that operating earnings start to become less relevant, my buying power will be perfectly intact and I will be able to shift focus from operating businesses to investments. A 15% CAGR in BV will go on, only from year 5 or 6 onward the largest contributors will be investments, instead of operating businesses. Most important, this way I see almost zero chance of screwing things up! (Hey! I know I will find a way nonetheless… but don’t tell my partners!! ;D) Now, what’s wrong with my reasoning? I think each one of us must have a strategic vision for his/her very unique situation. Because in the end only a soundly thought out plan, followed with discipline, is what will lead to good results. Rules and quotations won’t get you there. giofranchi Link to comment Share on other sites More sharing options...
racemize Posted July 28, 2013 Share Posted July 28, 2013 This may not be the norm but it has been done before. From 1820 to 1858, in the US the money supply increased 5x but prices declined by 33%. From 1875 to 1900, the money supply doubled but prices again declined by 33%. From what I see price increases are caused by wars in the 1800's and early to mid 1900's and lack of productive capacity in the late 1900's via communism. Packer Packer (and anyone else), is there a good place to find a history of the U.S. financial system, e.g., to read about these periods? I've been looking for a good book that has detailed information about the various financial events, just to have some history to be able to rely on. I'm fairly well-versed from 1923 on, but wouldn't mind beefing that up as well. Link to comment Share on other sites More sharing options...
giofranchi Posted July 28, 2013 Author Share Posted July 28, 2013 This may not be the norm but it has been done before. From 1820 to 1858, in the US the money supply increased 5x but prices declined by 33%. From 1875 to 1900, the money supply doubled but prices again declined by 33%. From what I see price increases are caused by wars in the 1800's and early to mid 1900's and lack of productive capacity in the late 1900's via communism. Packer Packer (and anyone else), is there a good place to find a history of the U.S. financial system, e.g., to read about these periods? I've been looking for a good book that has detailed information about the various financial events, just to have some history to be able to rely on. I'm fairly well-versed from 1923 on, but wouldn't mind beefing that up as well. I would suggest the following list: [amazonsearch]A Monetary History of the United States, 1867-1960[/amazonsearch] [amazonsearch]A History of Interest Rates[/amazonsearch] [amazonsearch]The Great Wave, Price Revolutions and the Rhythm of History[/amazonsearch] [amazonsearch]This Time Is Different, Eight Centuries of Financial Folly[/amazonsearch] Cheers! giofranchi Link to comment Share on other sites More sharing options...
txlaw Posted July 28, 2013 Share Posted July 28, 2013 Gio, I enjoy reading these papers, so thanks for continuing to post them. Reading through this thread, I've had some thoughts occur to me that I want to put to paper. Uncertainty vs. risk: One of the things that I tend to agree with is the notion that "uncertainty" and "risk" are two different things. So while there may be uncertainty about what will happen with the global economy, this doesn't necessarily tell you whether or not you are taking inordinate risks when making your investments. Take BAC in, say, 2006. At that time, one was taking a lot of risk by putting money into BAC, but uncertainty about the global economy was much less pervasive than it is today. At this time, uncertainty about the global economy abounds, but putting money into BAC is far less risky. You will make a decent long term real return at these prices even if the global economy stagnates. The bottom line is that uncertainty isn't necessarily a bad thing for us value investors if Mr. Market gives us bargains as a result of the uncertainty. Do you agree with this view? Preparing for rainy days vs. preparing for outstanding investment opportunities: Gio, one thing that is a bit unclear from your posts is if you are really talking about: (1) keeping cash on hand for a rainy day that could seriously affect your firm; (2) keeping cash on hand to participate in outstanding buying opportunities you anticipate will occur in the future; or (3) some combination of the two. You do mention that you want your firm to hold cash as a safety net. This seems very prudent, as you have working capital requirements that you have to deal with, and you need to be prepared in case an economic downturn affects your real business. Therefore, it would make a lot of sense to set aside a minimum of X cash reserves to prepare for any such rainy days. Sort of like how FFH keeps $1 billion of cash at the holdco to deal with future rainy days (including cat losses that could occur). What I don't understand is why market pricing should affect your firm's safety net at all. That is, if you have determined that you need to have X amount of liquid purchasing power at your firm's disposal at all times in order to remain Fortress Gio, it really shouldn't matter -- from a safety net perspective -- if the excess capital you have over X amount gets put into capital markets investments that fluctuate in pricing, especially since you seem to be a "buy and hold long term" investor. So it seems like when you talk about allocating some % of your excess capital to cash, you are really doing so in anticipation of buying opportunities. Which is perfectly fine if you don't think any good opportunities exist now or if you truly think outstanding opportunities will present themselves at a later date due to macro factors. However, a lot of us feel that there are outstanding opportunities now, and since we cannot predict whether there will be outstanding opportunities en masse at a later date, we will go ahead and allocate capital to our current ideas. Link to comment Share on other sites More sharing options...
giofranchi Posted July 28, 2013 Author Share Posted July 28, 2013 Uncertainty vs. risk: One of the things that I tend to agree with is the notion that "uncertainty" and "risk" are two different things. So while there may be uncertainty about what will happen with the global economy, this doesn't necessarily tell you whether or not you are taking inordinate risks when making your investments. Take BAC in, say, 2006. At that time, one was taking a lot of risk by putting money into BAC, but uncertainty about the global economy was much less pervasive than it is today. At this time, uncertainty about the global economy abounds, but putting money into BAC is far less risky. You will make a decent long term real return at these prices even if the global economy stagnates. The bottom line is that uncertainty isn't necessarily a bad thing for us value investors if Mr. Market gives us bargains as a result of the uncertainty. Do you agree with this view? Hi txlaw, Yes! Of course I agree! The view I don’t agree with is that anyone can be confident enough to say: I know BAC well, therefore I can judge its true value, therefore I know it is a bargain. Imo a $2 trillion organization is just too difficult! I always try to keep in mind Mr. Keynes words: 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. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence. If he felt himself entitled to invest in only two or three enterprises, because he was positive they were the only ones he knew well enough, who are we to act differently? Yet, I fear it is way too easy to deceive ourselves into thinking that we know and understand something… Preparing for rainy days vs. preparing for outstanding investment opportunities: Gio, one thing that is a bit unclear from your posts is if you are really talking about: (1) keeping cash on hand for a rainy day that could seriously affect your firm; (2) keeping cash on hand to participate in outstanding buying opportunities you anticipate will occur in the future; or (3) some combination of the two. You do mention that you want your firm to hold cash as a safety net. This seems very prudent, as you have working capital requirements that you have to deal with, and you need to be prepared in case an economic downturn affects your real business. Therefore, it would make a lot of sense to set aside a minimum of X cash reserves to prepare for any such rainy days. Sort of like how FFH keeps $1 billion of cash at the holdco to deal with future rainy days (including cat losses that could occur). What I don't understand is why market pricing should affect your firm's safety net at all. That is, if you have determined that you need to have X amount of liquid purchasing power at your firm's disposal at all times in order to remain Fortress Gio, it really shouldn't matter -- from a safety net perspective -- if the excess capital you have over X amount gets put into capital markets investments that fluctuate in pricing, especially since you seem to be a "buy and hold long term" investor. So it seems like when you talk about allocating some % of your excess capital to cash, you are really doing so in anticipation of buying opportunities. Which is perfectly fine if you don't think any good opportunities exist now or if you truly think outstanding opportunities will present themselves at a later date due to macro factors. However, a lot of us feel that there are outstanding opportunities now, and since we cannot predict whether there will be outstanding opportunities en masse at a later date, we will go ahead and allocate capital to our current ideas. Well, of course a combination of the two! My firm falls in the category of those businesses which hold more cash than it is strictly necessary to always assure their operations will be smoothly run. Therefore, I hold some cash both to be sure that working capital will never fall short of what is really necessary, AND to take advantage of future opportunities. You see? I think I know very few businesses… Hey! I am smarter than Mr. Keynes was, so I don’t confine my circle of competence to two or three enterprises… ;D ;D Let’s say I think I know 15-20 names I am perfectly confident to invest my firm’s capital. Unfortunately, no one among them is dirt cheap today… FFH, which I think is dirt cheap, is already 30% of my firm’s portfolio… That’s why I hold cash, hoping to get the chance to average down in those 15-20 names in the future! By the way, I was rereading Alleghany 2012 letter to shareholders and I have found this: pure value opportunities are few and far between This judgment is very common among the managers I admire and respect. Instead, it seems that on this board outstanding opportunities are everywhere! I am not a trader, I don’t follow 100, 500, or 1000 stocks, so I guess I truly cannot know… Yet, I would suggest that this board go and talk to Alleghany and others… No? Why not to sell them your precious ideas? They have deep pockets, but apparently are short of ideas! ;) giofranchi Link to comment Share on other sites More sharing options...
writser Posted July 28, 2013 Share Posted July 28, 2013 Yet, I would suggest that this board go and talk to Alleghany and others… No? Why not to sell them your precious ideas? They have deep pockets, but apparently are short of ideas! ;) giofranchi They have probably 1000x more AUM than the average investor on this forum, hence the universe of stocks they can pick from is much smaller. If they don't see interesting opportunities that doesn't mean there are none for you. Link to comment Share on other sites More sharing options...
giofranchi Posted July 28, 2013 Author Share Posted July 28, 2013 Yet, I would suggest that this board go and talk to Alleghany and others… No? Why not to sell them your precious ideas? They have deep pockets, but apparently are short of ideas! ;) giofranchi They have probably 1000x more AUM than the average investor on this forum, hence the universe of stocks they can pick from is much smaller. If they don't see interesting opportunities that doesn't mean there are none for you. Well, Awilco Drilling, for instance, is a $3.45 billion capitalization company. Alleghany has only $500 million invested in publicly-traded energy companies... Therefore, if AWLCF is such a good bargain today, it is beyond me to understand why Alleghany wouldn't heed your suggestion! ;) giofranchi Link to comment Share on other sites More sharing options...
txlaw Posted July 28, 2013 Share Posted July 28, 2013 The view I don’t agree with is that anyone can be confident enough to say: I know BAC well, therefore I can judge its true value, therefore I know it is a bargain. Imo a $2 trillion organization is just too difficult! Gio, fair enough on this point. There are many value investors who would agree with you on this notion that BAC is too big to understand. I would disagree. Further I actually think that because BAC is so big, I have the benefits of business diversification that makes BAC a stronger investment than a local bank, sort of like an insurer that is diversified across jurisdictions or a conglomerate that is diversified across businesses. (When is your conglomerate going public, btw? Let me know so I can invest ;) ) If I owned a local or community bank, I feel I would have to watch that company like a hawk to make sure that the local economy was not in peril and to really make sure that the underwriting was very good, since all the eggs would be in that local basket. I'd be exposing myself to localized disasters that could wipe out my investment. But I get your point and respect your hard line decision to stay away from companies like BAC. I'm curious, do you stay away from all banks? You see? I think I know very few businesses… Hey! I am smarter than Mr. Keynes was, so I don’t confine my circle of competence to two or three enterprises… ;D ;D Let’s say I think I know 15-20 names I am perfectly confident to invest my firm’s capital. Unfortunately, no one among them is dirt cheap today… FFH, which I think is dirt cheap, is already 30% of my firm’s portfolio… That’s why I hold cash, hoping to get the chance to average down in those 15-20 names in the future! This is also a fair point. If you feel your CoC is limited, and the companies in your CoC are not attractive enough to put money into at this time, it makes sense to put money into cash. But then I suppose you must admit, as I think you did above, that portfolio allocation is a very personal thing and one cannot look to GMO to provide a solution as to how much one's portfolio must be kept in cash. There are no bright line rules to follow here. If you truly see a company trading at 50 cents on the dollar, then you ought to put money into it because there's no guaranty that you will be able to do so at a later date. By the way, I was rereading Alleghany 2012 letter to shareholders and I have found this: pure value opportunities are few and far between This judgment is very common among the managers I admire and respect. Instead, it seems that on this board outstanding opportunities are everywhere! I am not a trader, I don’t follow 100, 500, or 1000 stocks, so I guess I truly cannot know… Yet, I would suggest that this board go and talk to Alleghany and others… No? Why not to sell them your precious ideas? They have deep pockets, but apparently are short of ideas! ;) If they paid me, I'd be glad to sell them my ideas, although they could get them for free from this online community. ;D Honestly, I would rather take ideas from PlanMaestro or Ericopoly than from Allegheny or Einhorn or even Oaktree. Perhaps that's my contrarian nature, but I don't think think those guys are any less investors than the teams at the institutions I just mentioned. If anything, I like that they're not inhibited by the institutional imperative like the teams at those fine investment institutions. I really do see opportunities everywhere, and a lot of them came to my attention because of this board! Link to comment Share on other sites More sharing options...
Valuebo Posted July 28, 2013 Share Posted July 28, 2013 Uncertainty vs. risk: One of the things that I tend to agree with is the notion that "uncertainty" and "risk" are two different things. So while there may be uncertainty about what will happen with the global economy, this doesn't necessarily tell you whether or not you are taking inordinate risks when making your investments. Take BAC in, say, 2006. At that time, one was taking a lot of risk by putting money into BAC, but uncertainty about the global economy was much less pervasive than it is today. At this time, uncertainty about the global economy abounds, but putting money into BAC is far less risky. You will make a decent long term real return at these prices even if the global economy stagnates. The bottom line is that uncertainty isn't necessarily a bad thing for us value investors if Mr. Market gives us bargains as a result of the uncertainty. Do you agree with this view? Hi txlaw, Yes! Of course I agree! The view I don’t agree with is that anyone can be confident enough to say: I know BAC well, therefore I can judge its true value, therefore I know it is a bargain. Imo a $2 trillion organization is just too difficult! I always try to keep in mind Mr. Keynes words: Uhhh yet you have 30% of your portfolio in Fairfax. As if that is an easy to understand business! Not to attack you but let's face it; you're not an insurance expert. You are betting on the jockey here. Fairfax is a complex business in a very complex sector. Unless I'm terribly mistaken, you aren't a true expert of all it's moving parts. At best there are a few members here that have a really good grasp of all of Fairfax' details. Yes, the same goes for companies like BAC. But even much simpler companies have many unknown risks and uncertainties. There are a wide range of future possible outcomes for all companies. You just have to accept this fact as an investor and realize that at a certain price, you are likely to have a large enough MoS even including those unknowns and uncertainties. Plenty of members here have proven that going against Mr Market's fear of uncertainty can truly be worth it! Link to comment Share on other sites More sharing options...
Guest longinvestor Posted July 29, 2013 Share Posted July 29, 2013 Uncertainty vs. risk: If he felt himself entitled to invest in only two or three enterprises, because he was positive they were the only ones he knew well enough, who are we to act differently? Yet, I fear it is way too easy to deceive ourselves into thinking that we know and understand something… You see? I think I know very few businesses… Hey! I am smarter than Mr. Keynes was, so I don’t confine my circle of competence to two or three enterprises… ;D ;D Let’s say I think I know 15-20 names I am perfectly confident to invest my firm’s capital. Unfortunately, no one among them is dirt cheap today… FFH, which I think is dirt cheap, is already 30% of my firm’s portfolio… That’s why I hold cash, hoping to get the chance to average down in those 15-20 names in the future! giofranchi Gio, you have frequently made the case that FFH is dirt cheap, would you care to share what keeps you limited at 30% of your portfolio? You even started the discussion thread that you are mulling increasing it to 50%, 60% or more. What keeps you from pulling the trigger and going 50%, 60% or more in FFH? Are you looking for dirt cheap"er"? Is cash better than going "all in" to something you have deep conviction in? Link to comment Share on other sites More sharing options...
Kiltacular Posted July 29, 2013 Share Posted July 29, 2013 Further I actually think that because BAC is so big, I have the benefits of business diversification that makes BAC a stronger investment than a local bank, sort of like an insurer that is diversified across jurisdictions or a conglomerate that is diversified across businesses. I think this is a good point. Forgetting the specific situation of large banks for a moment, the general idea seems sometimes to be under-appreciated by investors but much appreciated by business owners / operators. Back in the days when I was in the throes of infatuation of learning from Buffett, I used to talk with an investor friend who said that "valuing Berkshire was too hard because they had so many different businesses / revenue streams". I said that I felt the opposite. The different revenue streams made it easier to value for me. I was gratified that some years later, Buffett actually noted this in an annual report. Munger has pointed out that every business (even every civilization) ends. I realize that's a depressing thought to many. But, if one let's the depressing part of it pass and accepts it, then one can think about how to approach investments (or other parts of life) if Munger is correct. Berkshire has put this idea into practice by letting many businesses slowly run / die without sinking ever more capital into the same idea but instead using the profits to buy other idea whose life has some years in front of it. I hope I didn't hijack this thread. Anyway, on the large banks, one should ask himself, why did Buffett say recently that: "I guarantee you the big banks won't be the thing that next gets us into trouble." The people that made the big banks huge positions at the lows likely had this figured out. Link to comment Share on other sites More sharing options...
giofranchi Posted July 29, 2013 Author Share Posted July 29, 2013 The view I don’t agree with is that anyone can be confident enough to say: I know BAC well, therefore I can judge its true value, therefore I know it is a bargain. Imo a $2 trillion organization is just too difficult! Gio, fair enough on this point. There are many value investors who would agree with you on this notion that BAC is too big to understand. I would disagree. Further I actually think that because BAC is so big, I have the benefits of business diversification that makes BAC a stronger investment than a local bank, sort of like an insurer that is diversified across jurisdictions or a conglomerate that is diversified across businesses. (When is your conglomerate going public, btw? Let me know so I can invest ;) ) If I owned a local or community bank, I feel I would have to watch that company like a hawk to make sure that the local economy was not in peril and to really make sure that the underwriting was very good, since all the eggs would be in that local basket. I'd be exposing myself to localized disasters that could wipe out my investment. But I get your point and respect your hard line decision to stay away from companies like BAC. I'm curious, do you stay away from all banks? Hi txlaw, with all due respect, that’s exactly what I meant when I said that it is very easy to fool ourselves into thinking that we know a company…! Business diversification… doesn’t mean anything to me. Too big, too systemically important, too diversified… to fail? Don’t mean anything to me. We all witnessed how a single decision taken by Mr. Lewis in 2008, to buy Countrywide Financial, almost brought that mighty organization down to its knees… Look, to really know a business, you should be “signing all the checks”, like Mr. Ergen so masterfully put it. That’s why, if it were for me, I would go only after businesses that I own, control, and manage from a strategic point of view, not a day by day running of their operations. Unfortunately, life is hard, the world in which we live is unjust, I am misunderstood and unlucky, etc. … whatever! The simple fact is I don’t have enough capital to buy whole businesses! That’s why, even though regretfully, I must invest in the stock market. And if I cannot do it all by myself, the second best alternative is to partner with someone who owns, controls, and manages from a strategic point of view, not a day by day running of its operations, a business. I demand: 1) that person should put his/her interests and mine at the same level, 2) that person explains very clearly what he is doing, so that I might be positive I would be doing the same things. If I am sure about 1) and 2), well, it then becomes something much similar to a business that I own, control, and manage from a strategic point of view, not a day by day running of its operations! That’s exactly why I have repeated many times that I focus on the modus operandi, on the process, on HOW that person I call my partner is doing things, much more than on WHAT he is doing. That’s why I have repeated many times that I invest in FFH because I would be doing exactly the same things, if I were in their stead. Instead of trying to know and evaluate everything FFH is doing, which I think is impossible because I am not the one “signing all the checks”, I focus on how FFH is conducting its businesses. I hope this answers also to tombgrt’s objection (hey! I know that there will always be uncertainties… as I have said, unfortunately this is only the second best alternative! And even to own whole businesses, my first choice hands down, would entail its own uncertainties and risks). As you might imagine this limits the number of companies in which I would invest very much… to tell the truth the great majority of publicly traded companies are uninvestable to me. Beware! I have said uninvestable, not untradable! Practically all of them are tradable and I agree with tombgrt that there is the potential to make a lot of money trading them… I would add, if that is how you like to spend your time! As far as banks are concerned, I don’t really understand the banking business. I am always skeptical of a business that must be levered 10 to 1, just to produce a mediocre ROE… Anyway, if I had to invest in banks, at the right price I would choose something like BOKF. giofranchi BOKF.bmp Link to comment Share on other sites More sharing options...
txlaw Posted July 29, 2013 Share Posted July 29, 2013 Hi txlaw, with all due respect, that’s exactly what I meant when I said that it is very easy to fool ourselves into thinking that we know a company…! Business diversification… doesn’t mean anything to me. Too big, too systemically important, too diversified… to fail? Don’t mean anything to me. We all witnessed how a single decision taken by Mr. Lewis in 2008, to buy Countrywide Financial, almost brought that mighty organization down to its knees… Gio, I think you are misunderstanding my point about business diversification. I'm not talking about TBTF or too systemically important to fail. I'm talking about the inherent benefits associated with business line diversification and geographic diversification that are attached to a large organization like BAC versus a smaller organization like, say, a local bank. You could easily replace BAC vs. local bank with TRV vs. some no-name insurer that only underwrites policies regionally. Or KO vs. a beverage company that generates most business locally (e.g., National Beverage). Or Diageo vs. a local distiller. Or a diversified REIT vs. owning a local office building. And on and on and on. It's why I don't buy the argument that microcaps are the best way to go about value investing. I don't necessarily like putting my eggs in the small company baskets -- certainly not with a concentrated portfolio, which is my preferred style of investing. One of the things about owning, say, a Berkshire is that it is diversified across a number of business lines across different geographies. So when someone puts in a ton of their portfolio into BRK, they actually own a hugely diversified conglomerate, which makes it sensible IMO to put a large percentage of the portfolio into BRK for the long term. Note that you yourself appear to be engaging in business diversification because you don't want to be completely dependent on an Italian engineering services business that could deteriorate at some point in the future! Look, to really know a business, you should be “signing all the checks”, like Mr. Ergen so masterfully put it. That’s why, if it were for me, I would go only after businesses that I own, control, and manage from a strategic point of view, not a day by day running of their operations. Unfortunately, life is hard, the world in which we live is unjust, I am misunderstood and unlucky, etc. … whatever! The simple fact is I don’t have enough capital to buy whole businesses! That’s why, even though regretfully, I must invest in the stock market. And if I cannot do it all by myself, the second best alternative is to partner with someone who owns, controls, and manages from a strategic point of view, not a day by day running of its operations, a business. Well, I don't agree that one must micromanage a company to understand the business, or even that one must be engaged as an employee or manager at a business to understand it. And, Gio, with all due respect, I'm not sure you're practicing what you preach when you invest in FFH or GLRE or OAK or Third Point Offshore. All of these guys are doing exactly what you refuse to do! Which is to put money into businesses where they don't sign the checks. In fact, there are many positions in these guys' portfolios that are completely passive, where they don't even talk to the folks they're invested in. FFH is only an attractive business for that very reason. So investing in FFH is sort of inconsistent with what you just said, especially because it is one of the more complicated companies that we talk about on this board (much more dangerous than most well run banks)! You should be putting money into owner-operators that are focused only on understanding the business they manage if that's your MO. As far as banks are concerned, I don’t really understand the banking business. I am always skeptical of a business that must be levered 10 to 1, just to produce a mediocre ROE… Anyway, if I had to invest in banks, at the right price I would choose something like BOKF. giofranchi This point I don't understand at all because you seem to invest a great deal of money into insurance companies, which can be considered highly levered as well. After all, when one takes in a $1 premium and subjects themselves to a potential $10 loss, that's taking on a massive amount of leverage. And the risks associated with insurance portfolios can be much worse than what is lurking in a loan portfolio. Even in the worst of economic times, you often don't see the huge losses in bank portfolios that you see when insurance companies get on the hook for huge losses due to unforeseen insured risks. So if you're willing to invest a complicated insurance company like FFH, you really ought to be comfortable with investing in a bank. Link to comment Share on other sites More sharing options...
giofranchi Posted July 29, 2013 Author Share Posted July 29, 2013 txlaw, on the contrary, I think I have understood perfectly well what you mean by diversification. And in theory I also agree with you. But in practice I still think it gives a false sense of security. In practice, like Mr. Lewis and many others have demonstrated time and time again, one very bad decision taken by a fool at the wrong time is enough to bring down even the most diversified of business organizations. I don’t understand why it is so difficult to believe that I truly have nothing against trading… It is simply that I don’t like to spend my time looking for statistically cheap stocks, jumping in when I have found one, and out when it gets to IV. But, if FFH does just that on my behalf, with the benefit of float, which I don’t enjoy, well then I am perfectly fine with it! It is a good way to make money! Still, I call it trading, not investing… If it is not clear, think about what they did with International Coal (in attachment) and think about what they are doing with Kennedy Wilson. The first I call trading, the second I call investing. If they do both and make money, well I am very happy! But why insisting in calling investing what instead is trading? If you recognize a statistically cheap stock, and you want to take advantage of it, very well! Do it! But don’t tell me that you know the business very well… because it is even useless to know it very well! Even Mr. Graham has always acknowledged he didn’t know the great majority of the stocks he put money into very well. He just recognized a cheap stock, when he saw one! For what I know also he was an investor at least once, that’s to say in Geico. And he probably really knew that business, and stayed with it for years or decades, and really wanted to own it, he was confident about its future prospects and potential growth, and didn’t care too much about valuation, at least not until its share price really got wildly expensive… Probably, I cannot express myself clearly enough, but to me the difference between playing a temporary undervaluation, and owning a business is self evident… in the first case you don’t really need to know the business, in the second, if you don’t know it very well, you are looking for trouble! How is well enough? I prefer to be conservative and repeat that well enough is how I know the to businesses I personally manage… but, if that is too much, think about twacowfca and how well he knows Lancashire… that would be well enough for me too!! Of course, I completely disagree that FFH is more dangerous than most “well run” banks… whatever “well run” might mean… But I have talked so much about FFH, and here in Italy it is getting late… Let’s just say that the 9 out of 10 a bank collects in bonds and deposits is not safer nor more dangerous than the 1.5 out of 2.5 an insurance company collects in float… to think it is safer is another false sense of security… because it all depends on people and the choices they make. A group of people that collects deposits and feels safe imo is instead in greater danger than a group of people that knows they are dealing with probabilities and are very focused on not making any error and on improving their underwriting skills. One thing about leverage: 2.5 to 1 is a completely different thing than 10 to 1! To get a good 15% ROE, FFH must achieve a 7% return on its portfolio of investments. Instead, a bank that is levered 10 to 1 could achieve less that 2%… and yet FFH has an history of 20% ROE, while the average bank probably doesn’t get to 10% ROE… giofranchi International_Coal.bmp Link to comment Share on other sites More sharing options...
txlaw Posted July 29, 2013 Share Posted July 29, 2013 txlaw, on the contrary, I think I have understood perfectly well what you mean by diversification. And in theory I also agree with you. But in practice I still think it gives a false sense of security. In practice, like Mr. Lewis and many others have demonstrated time and time again, one very bad decision taken by a fool at the wrong time is enough to bring down even the most diversified of business organizations. A fool can take a company down whether it's a big or small organization. That shouldn't lead you to conclude that a big organization cannot be more resilient than a smaller organization. Coca Cola is a very resilient business, and that is in part due to its size and scale (you can't attribute all of its success to the brand). In fact, Coca Cola is one of those businesses that would be hard to be taken down by a person at the top who is a fool. (As Peter Lynch recommended, and as WEB once endorsed, "Go for a business that any idiot can run -- because sooner or later, an idiot probably is going to run it.") Both banks and insurance companies recognize the benefits of diversifying their business to have increased resilience. Indeed, ask Mr. Watsa whether he wants his insurance operations to be more diversified, and I'm sure he would say yes, so long as the underwriting remains under control. And FFH also appears to be diversifying into non-insurance businesses. The bottom line is that when it comes to business diversification, it is not a question of practice vs. theory. In practice, one can definitely have a more resilient company through diversification. You shouldn't throw this notion out simply because you think that the "big banks" are not resilient. I don’t understand why it is so difficult to believe that I truly have nothing against trading… It is simply that I don’t like to spend my time looking for statistically cheap stocks, jumping in when I have found one, and out when it gets to IV. But, if FFH does just that on my behalf, with the benefit of float, which I don’t enjoy, well then I am perfectly fine with it! It is a good way to make money! Still, I call it trading, not investing… If it is not clear, think about what they did with International Coal (in attachment) and think about what they are doing with Kennedy Wilson. The first I call trading, the second I call investing. If they do both and make money, well I am very happy! But why insisting in calling investing what instead is trading? If you recognize a statistically cheap stock, and you want to take advantage of it, very well! Do it! But don’t tell me that you know the business very well… because it is even useless to know it very well! Even Mr. Graham has always acknowledged he didn’t know the great majority of the stocks he put money into very well. He just recognized a cheap stock, when he saw one! For what I know also he was an investor at least once, that’s to say in Geico. And he probably really knew that business, and stayed with it for years or decades, and really wanted to own it, he was confident about its future prospects and potential growth, and didn’t care too much about valuation, at least not until its share price really got wildly expensive… Probably, I cannot express myself clearly enough, but to me the difference between playing a temporary undervaluation, and owning a business is self evident… in the first case you don’t really need to know the business, in the second, if you don’t know it very well, you are looking for trouble! How is well enough? I prefer to be conservative and repeat that well enough is how I know the to businesses I personally manage… but, if that is too much, think about twacowfca and how well he knows Lancashire… that would be well enough for me too!! You are free to call anything that isn't "buy and hold" investing as "trading." I'm sure most of us on the board wouldn't, but what you call it doesn't matter anyways. What's wrong with what your arguing is that you are assuming that anyone who is buying and selling a business in a short time frame (under your rubric of what is a short time frame) doesn't understand the business and is relying solely on "statistical cheapness." This is just wrong. I guarantee you there are folks on this board who know FFH far better than recent purchasers, but who have sold FFH when it reached IV. Rather than conflating "trading" with "not understanding the business," why not say what I think you are probably getting at, which is that you only want to invest in businesses on a "buy and hold" basis if you can "control and manage" the company, or if you are confident that the management team in place is a solid one that has "skin in the game." If that's the case, that's fine. But all these other arguments about how investors who don't invest the same way don't "understand the business" or are not being "conservative" simply don't hold water. Of course, I completely disagree that FFH is more dangerous than most “well run” banks… whatever “well run” might mean… But I have talked so much about FFH, and here in Italy it is getting late… Let’s just say that the 9 out of 10 a bank collects in bonds and deposits is not safer nor more dangerous than the 1.5 out of 2.5 an insurance company collects in float… to think it is safer is another false sense of security… because it all depends on people and the choices they make. A group of people that collects deposits and feels safe imo is instead in greater danger than a group of people that knows they are dealing with probabilities and are very focused on not making any error and on improving their underwriting skills. One thing about leverage: 2.5 to 1 is a completely different thing than 10 to 1! To get a good 15% ROE, FFH must achieve a 7% return on its portfolio of investments. Instead, a bank that is levered 10 to 1 could achieve less that 2%… and yet FFH has an history of 20% ROE, while the average bank probably doesn’t get to 10% ROE… I would say you have a false sense of security about the insurance business because of the great investors who have decided to use such companies as their investment vehicles. Insurance can be a very dangerous business, much more so than banking, which is why WEB and Watsa are so vigilant about their underwriting (at least one hopes in the case of FFH). No banker should be complacent either, but the reason why a bank can be levered 10 to 1 is because that's the nature of the business. Ultimately, you only want to buy a bank or insurance company for the long run if it is well managed. On that I can agree with you. But I'm not sure why you would say the insurance biz is less risky than the banking biz. Link to comment Share on other sites More sharing options...
Valuebo Posted July 29, 2013 Share Posted July 29, 2013 txlaw, on the contrary, I think I have understood perfectly well what you mean by diversification. And in theory I also agree with you. But in practice I still think it gives a false sense of security. In practice, like Mr. Lewis and many others have demonstrated time and time again, one very bad decision taken by a fool at the wrong time is enough to bring down even the most diversified of business organizations. A fool can take a company down whether it's a big or small organization. That shouldn't lead you to conclude that a big organization cannot be more resilient than a smaller organization. Coca Cola is a very resilient business, and that is in part due to its size and scale (you can't attribute all of its success to the brand). In fact, Coca Cola is one of those businesses that would be hard to be taken down by a person at the top who is a fool. (As Peter Lynch recommended, and as WEB once endorsed, "Go for a business that any idiot can run -- because sooner or later, an idiot probably is going to run it.") Yes! Yet even Coca Cola isn't invinsible! Coca-Cola has the most valuable brand name in the world and, as one of the most visible companies worldwide, has a tremendous opportunity to excel in all dimensions of business performance. However, over the last ten years, the firm has struggled to reach its financial objectives and has been associated with a number of ethical crises. Warren Buffet served as a member of the board of directors and was a strong supporter and investor in Coca-Cola but resigned from the board in 2006 after several years of frustration with Coca-Cola's failure to overcome many challenges. Many issues were facing Doug Investor when he took over the reins at Coca-Cola in 1997. Investor was heralded for his ability to handle the financial flows and details of the soft-drink giant. Former-CEO Roberto Goizueta had carefully groomed Investor for the top position that he assumed in October 1997 after Goizueta's untimely death. However, Investor seemed to lack leadership in handling a series of ethical crises, causing some to doubt "Big Red's" reputation and its prospects for the future. For a company with a rich history of marketing prowess and financial performance, Ivester's departure in 1999 represented a high-profile glitch on a relatively clean record in one hundred years of business. In 2000 Doug Daft, the company's former president and chief operating officer, replaced Investor as the new CEO. Daft's tenure was rocky, and the company continued to have a series of negative events in the early 2000s. For example, the company was allegedly involved in racial discrimination, misrepresenting market tests, manipulating earnings, and disrupting long-term contractual arrangements with distributors. By 2004 Daft was out and Neville Isdell had become president and worked to improve Coca-Cola's reputation. etc Source: http://brainmass.com/business/business-law/220191 I believe one of the better Buffett bio's has some good information on it as well. I forgot which one. Not pointed at you of course txlaw but my point is that there is no ultimate safety. Not in BAC, not in KO, not in FFH and not even in BRK. There is no such thing as perfect correlation between risk, uncertainty, unknowns and the price you pay and therefore going for those bargains like BAC makes perfect sense. Of course, I completely disagree that FFH is more dangerous than most “well run” banks… whatever “well run” might mean… But I have talked so much about FFH, and here in Italy it is getting late… Let’s just say that the 9 out of 10 a bank collects in bonds and deposits is not safer nor more dangerous than the 1.5 out of 2.5 an insurance company collects in float… to think it is safer is another false sense of security… because it all depends on people and the choices they make. A group of people that collects deposits and feels safe imo is instead in greater danger than a group of people that knows they are dealing with probabilities and are very focused on not making any error and on improving their underwriting skills. One thing about leverage: 2.5 to 1 is a completely different thing than 10 to 1! To get a good 15% ROE, FFH must achieve a 7% return on its portfolio of investments. Instead, a bank that is levered 10 to 1 could achieve less that 2%… and yet FFH has an history of 20% ROE, while the average bank probably doesn’t get to 10% ROE… I would say you have a false sense of security about the insurance business because of the great investors who have decided to use such companies as their investment vehicles. Insurance can be a very dangerous business, much more so than banking, which is why WEB and Watsa are so vigilant about their underwriting (at least one hopes in the case of FFH). No banker should be complacent either, but the reason why a bank can be levered 10 to 1 is because that's the nature of the business. Ultimately, you only want to buy a bank or insurance company for the long run if it is well managed. On that I can agree with you. But I'm not sure why you would say the insurance biz is less risky than the banking biz. +1. This whole issue is a lot more complex than gio is making it out to be. Sorry but that post was terribly simplistic. Selection bias?? There is no easy one-dimensional answer. Link to comment Share on other sites More sharing options...
Valuebo Posted July 29, 2013 Share Posted July 29, 2013 Oh and about what constitutes "investing". This is what one guy once had to say about it: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." I don't see what the specific period owning a certain security has to do with anything. Does owning a security longer make it safer, more valuable, less uncertain or anything else? Link to comment Share on other sites More sharing options...
vinod1 Posted July 30, 2013 Share Posted July 30, 2013 Oh and about what constitutes "investing". This is what one guy once had to say about it: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." I don't see what the specific period owning a certain security has to do with anything. Does owning a security longer make it safer, more valuable, less uncertain or anything else? His explanation of the definition of investing is also very interesting: - An “investment operation” is used instead of an issue because it is unsound to think of investment character as inhering in an issue since price is an essential element. So a stock may have investment merit at one price level but not at another. In addition, an investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly. - By “thorough analysis” Graham means, the study of the facts in the light of established standards of safety and value. As an example of analysis, paying 40 times its highest recorded earnings in 1929, merely because of its excellent prospects, would be clearly ruled out as devoid of all quality of thoroughness. - Graham notes that in “promises safety of principal” the “Safety” sought in an investment is not absolute or complete. It means, rather, protection against loss under all normal or reasonably likely conditions or variations. A safe stock is one which holds ever prospect of being worth the price paid except under quite unlikely contingencies. Where study and experience indicate that an appreciable chance of loss must be recognized and allowed for, we have a speculative situation. - “Satisfactory return” covers any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence. - An investment operation is one that can be justified on both qualitative and quantitative grounds. This is an additional criterion for investment. - A great deal of common stock buying is done with reasonable care and may be called intelligent speculation; a great is done upon inadequate consideration and for unsound reasons and thus must be called unintelligent; in exceptional cases a common stock may be bought on such attractive terms, qualitative and quantitative, as to set the inherent risk at a minimum and justify the title of investment. - It is possible to argue that issues with high degree of speculative risk individually may be made part of an investment operation provided (1) the changes of gain definitely outweigh those of loss and (2) there is ample diversification. Ex. Low priced common stocks meeting certain conditions and even long term calls to buy at prices much above their current levels. This is a marginal area in which distinctions between investment and speculation become blurred. Vinod Link to comment Share on other sites More sharing options...
giofranchi Posted July 30, 2013 Author Share Posted July 30, 2013 Hi txlaw, I really enjoy our discussion about the insurance and banking industry. But maybe this is not the right thread, and maybe other board members are not very interested... So, I have sent you a PM, and maybe we can go on sharing our views that way! :) giofranchi Link to comment Share on other sites More sharing options...
giofranchi Posted July 30, 2013 Author Share Posted July 30, 2013 Oh and about what constitutes "investing". This is what one guy once had to say about it: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." I don't see what the specific period owning a certain security has to do with anything. Does owning a security longer make it safer, more valuable, less uncertain or anything else? tombgrt, there is a reason why I use the words investing and trading: when you own a business for the long run, you must rely on the wealth that business is going to create through the years. If you buy it at a bargain price, that represents just an extra boost to your financial well being. Instead, if you keep buying below IV and selling at IV, you keep relying on mistakes made by the market, but very little on the long term wealth created by those businesses. Anyway, I understand why using the words “investing” and “trading” might cause misunderstandings, so let’s say instead “to buy and hold” and “to buy below IV and sell at IV”. Sorry, I didn't mean to mislead anyone! :) giofranchi Link to comment Share on other sites More sharing options...
rjstc Posted July 30, 2013 Share Posted July 30, 2013 Hi txlaw, I really enjoy our discussion about the insurance and banking industry. But maybe this is not the right thread, and maybe other board members are not very interested... So, I have sent you a PM, and maybe we can go on sharing our views that way! :) giofranchi Gio; this board member is interested!!! I feel like I'm sitting around a big table with my Many Italian friends drinking chianti, eating a big plate of spaghetti, loud debate going on. Arms and hands waving while points are made. Someone looking in might think there's going to be a fight. But it's always interesting and there are always new things learned. So please don't stop the open forums. If someone doesn't want to read they can just move on. Ron Link to comment Share on other sites More sharing options...
giofranchi Posted July 30, 2013 Author Share Posted July 30, 2013 Hi txlaw, I really enjoy our discussion about the insurance and banking industry. But maybe this is not the right thread, and maybe other board members are not very interested... So, I have sent you a PM, and maybe we can go on sharing our views that way! :) giofranchi Gio; this board member is interested!!! I feel like I'm sitting around a big table with my Many Italian friends drinking chianti, eating a big plate of spaghetti, loud debate going on. Arms and hands waving while points are made. Someone looking in might think there's going to be a fight. But it's always interesting and there are always new things learned. So please don't stop the open forums. If someone doesn't want to read they can just move on. Ron Hi Ron! I have started reading [amazonsearch]High Financier – The Lives and Time of Siegmund Warburg[/amazonsearch] by Niall Ferguson… maybe I will learn to love the banking business! Jokes aside, you know that I might have my ideas on the banking business and on the insurance business, but I never let my ideas get in the way of a great opportunity: if I find someone who is truly worth of my admiration and trust, even if he is a banker! ;D, rest assured that I will invest with him without thinking about it twice! ;) Cheers! Gio Link to comment Share on other sites More sharing options...
Guest ajc Posted July 30, 2013 Share Posted July 30, 2013 Gio; this board member is interested!!! I feel like I'm sitting around a big table with my Many Italian friends drinking chianti, eating a big plate of spaghetti, loud debate going on. Arms and hands waving while points are made. Someone looking in might think there's going to be a fight. But it's always interesting and there are always new things learned. So please don't stop the open forums. If someone doesn't want to read they can just move on. Ron +1 Link to comment Share on other sites More sharing options...
constructive Posted July 30, 2013 Share Posted July 30, 2013 The nice thing about the discussion over whether banks or insurance companies are more dangerous is that unlike many arguments on this board, it involves a testable hypothesis. In my opinion, data almost always proves more effective and more persuasive than rhetoric. And gio, I always appreciate your thinking. You've almost convinced me to invest in Fairfax and Lancashire, which is not an easy task. Maybe a few hundred more posts will do the trick. :) Link to comment Share on other sites More sharing options...
giofranchi Posted July 30, 2013 Author Share Posted July 30, 2013 You've almost convinced me to invest in Fairfax and Lancashire, which is not an easy task. Maybe a few hundred more posts will do the trick. :) ;D ;D ;D (I guess this post doesn't count... ;D) giofranchi Link to comment Share on other sites More sharing options...
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