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The Sure Thing


giofranchi
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This is consistent with the one undisputed finding in all the research on entrepreneurship: people who work for themselves are far happier than the rest of us. Shane says that the average person would have to earn two and a half times as much to be as happy working for someone else as he would be working for himself. And people who like what they do are profoundly conservative. When the sociologists Hongwei Xu and Martin Ruef asked a large sample of entrepreneurs and non-entrepreneurs to choose among three alternatives—a business with a potential profit of five million dollars with a twenty-per-cent chance of success, or one with a profit of two million with a fifty-per-cent chance of success, or one with a profit of $1.25 million with an eighty-per-cent chance of success—it was the entrepreneurs who were more likely to go with the third, safe choice. They weren’t dazzled by the chance of making five million dollars. They were drawn to the eighty-per-cent chance of getting to do what they love doing. The predator is a supremely rational actor. But, deep down, he is also a romantic, motivated by the simple joy he finds in his work.

--Malcom Gladwell

 

Mr. Gladwell definition of a “predator” is exactly what I have in mind when I refer to “outstanding capital allocators”. Why on earth wouldn’t you partner with people like that?  :)

 

giofranchi

 

“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.” - John Maynard Keynes

 

surething.pdf

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Yeah I don't really see why the entrepreneur is 'romantic'.  He's just got a very clear understanding that  if you have a 75% chance of zero profit, odds are you won't make much!

 

If, among 3 choices with exactly the same expected value (future profit x chance of success), the great majority of entrepreneurs expressed the same preference (business n.3), it really might follow that something other than pure algebra, and therefore rationality, is at work here. I generally agree with Mr. Gladwell that a higher chance “to do what they love doing” is important for most entrepreneurs. I myself would have chosen business n.3 without hesitation.  ;)

 

giofranchi

 

“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.” - John Maynard Keynes

 

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Any rational individual would choose minimum variance when the expected value is a given. Risk is something that should be paid for.

 

Did they find people without a gambling addiction and reasonable education that picked anything else but the third option?  :o

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Any rational individual would choose minimum variance when the expected value is a given. Risk is something that should be paid for.

 

Did they find people without a gambling addiction and reasonable education that picked anything else but the third option?  :o

 

Well, obviously that depends on where you are aiming at! Take, for instance, the thread racemize started a few days ago: “Absolute Investment Targets”. He points out Mr. Pabrai’s minimum requirement is expectation of 2-3x in 2-3 years, or 26% per annum. And that would rule out investments in such companies as BRK, FFH, LRE, OAK, MKL, LMCA, BAM, LUK, GLRE, TPOU, BH, IEP. Viceversa, I argued that exact portfolio, aided by some cash generating sources, gives you a very high probability of compounding capital at 15% per annum for many years to come. I said that the only true risk I see is the so-called “man at the helm risk”, but spreading it among 12 different companies, significantly mitigates that risk, leading to a very high probability of achieving the 15% per annum hurdle rate of compounded return.

 

Now, please, follow my reasoning: provided I am not a complete fool, it should be obvious that I think expected value to be the same in both cases. Otherwise, I would certainly switch to Mr. Pabrai’s strategy, with its 26% expected annual return! But, I also said that, starting with a capital of $1 million, and compounding capital for 50 years, you might reach $1 billion by the end of your career and productive life. Let’s suppose the USD depreciates by a factor of 5 during the next 50 years: your $1 billion then would be the equivalent of $200 million today. Very rich by any standard, but not even close to be in the Forbes 400. On the contrary, if by chance you’d really succeed in compounding capital at the rate Mr. Pabrai is suggesting, you would be worth not $1 billion, at the end of the aforementioned 50 years period, but $104 billion!! Which would be the equivalent of $21 billion today! Definitely among the richest persons in the US and on earth!

So, you see? If you are aiming at being included into the Forbes 400, you have no choice except embracing Mr. Pabrai’s strategy and expected annual return.

 

You talked about people with a gambling addiction… well, I don’t know about the US, but in Europe extremely successful entrepreneurs are seen by the great majority of people EXACTELY THAT WAY! And that is what Mr. Gladwell tried to disprove with his article.

Not only successful entrepreneurs are very rational, but, if asked to choose between “to do what they love doing” and the Forbes 400 list, they have no doubt and show no hesitation.  :)

 

giofranchi

 

“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.” - John Maynard Keynes

 

 

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I can't remember where I read this (someone on this board likely did and can advise), but the quote at the beginning of this thread reinforces the same notion, specifically, that entrepreneurs are not so much good at taking risk as they are good at assessing risk. For some reason, entrepreneurs have been portrayed as swash-buckling gamblers who, against all odds, prevail. This is very "romantic", I reckon, and is patently not true. If this group was given the opportunity to invest $X where one had a 50% chance of returning 4 times X and a 50% chance of losing it all, we would take that bet, every time. Life does afford those opportunities but does not advertise them. It requires an individual who can see this, assess it, and then have the wherewithal to make that bet.

 

Mr. Pabrai states in his book that he likes the "heads I win, tails I don't lose much" proposition, and we all would. He is just better at identifying those opportunities than most of us (present company INCLUDED) are.

 

-Crip

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Keep in mind the difference between get rich & stay rich.

To get rich you must take risk; & it must work out. Small investments in many ventures where the odds on a win are maybe 2 in 3 or better;  cost per venture an immediate write-off. You have nothing to lose & everything to gain - but you have to do it, before spouse & family tilt the ‘what you could lose’ against you. Something most youth just do not get. To stay rich you just need to outpace inflation; portfolio losses are your heir’s problem - barbell investments in low risk ventures with occasional high risk flyers. You have lots to lose, little to gain, & it starts right after you realize a material gain. Something most adults just do not get. 

 

You cannot stay rich unless you’re good at assessing risk. For most heirs, this will be a wealth manager earning the minimum return required.  But risk assessment includes assessing yourself, & your capabilities as you get older; which most DIY investors just do not get.

 

Serial entrepreneurship is no different to retaining your driving licence as long as possible; it is independence. The older you get the more valuable this is to you, & the more irritating it is to the public at large. The “act your age” social censure, versus fcuk  ‘em!

 

SD 

 

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quite frankly , I don't think you can achieve 15% or even 12.5% if you spread holding into BRK, FFH, OAK, etc., for the next 20 years

 

investment shouldn't be made too complex; but I also don't think it can be that simple

I am not a big fan of Munger

but He said sth like "if you think investment is very simple, you are very wrong" - I fully agree

 

Any rational individual would choose minimum variance when the expected value is a given. Risk is something that should be paid for.

 

Did they find people without a gambling addiction and reasonable education that picked anything else but the third option?  :o

 

Well, obviously that depends on where you are aiming at! Take, for instance, the thread racemize started a few days ago: “Absolute Investment Targets”. He points out Mr. Pabrai’s minimum requirement is expectation of 2-3x in 2-3 years, or 26% per annum. And that would rule out investments in such companies as BRK, FFH, LRE, OAK, MKL, LMCA, BAM, LUK, GLRE, TPOU, BH, IEP. Viceversa, I argued that exact portfolio, aided by some cash generating sources, gives you a very high probability of compounding capital at 15% per annum for many years to come. I said that the only true risk I see is the so-called “man at the helm risk”, but spreading it among 12 different companies, significantly mitigates that risk, leading to a very high probability of achieving the 15% per annum hurdle rate of compounded return.

 

Now, please, follow my reasoning: provided I am not a complete fool, it should be obvious that I think expected value to be the same in both cases. Otherwise, I would certainly switch to Mr. Pabrai’s strategy, with its 26% expected annual return! But, I also said that, starting with a capital of $1 million, and compounding capital for 50 years, you might reach $1 billion by the end of your career and productive life. Let’s suppose the USD depreciates by a factor of 5 during the next 50 years: your $1 billion then would be the equivalent of $200 million today. Very rich by any standard, but not even close to be in the Forbes 400. On the contrary, if by chance you’d really succeed in compounding capital at the rate Mr. Pabrai is suggesting, you would be worth not $1 billion, at the end of the aforementioned 50 years period, but $104 billion!! Which would be the equivalent of $21 billion today! Definitely among the richest persons in the US and on earth!

So, you see? If you are aiming at being included into the Forbes 400, you have no choice except embracing Mr. Pabrai’s strategy and expected annual return.

 

You talked about people with a gambling addiction… well, I don’t know about the US, but in Europe extremely successful entrepreneurs are seen by the great majority of people EXACTELY THAT WAY! And that is what Mr. Gladwell tried to disprove with his article.

Not only successful entrepreneurs are very rational, but, if asked to choose between “to do what they love doing” and the Forbes 400 list, they have no doubt and show no hesitation.  :)

 

giofranchi

 

“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.” - John Maynard Keynes

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quite frankly , I don't think you can achieve 15% or even 12.5% if you spread holding into BRK, FFH, OAK, etc., for the next 20 years

 

Well, it obviously depends on the price you pay. My list of companies was just an example… I own some of them today. Others I don’t. But, as a rule of thumb, if you can partner at or below BV per share with people who have showed for many years, through many business cycles, to be able to compound capital at 15% per annum, who are still relatively young, who manage a business that is not subject to obsolescence or rapid change, and hasn’t grown too large yet , well, then it is up to you to prove why the future will be different from the past! ;)

Moreover, practically every company in my list compounded capital at a higher rate than 15% per annum in the past.

No, really: if you could find a great business, led by an outstanding capital allocator, I would not part ways with it (unless, of course, it starts selling for way too much!).  :)

 

giofranchi

 

“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.” - John Maynard Keynes

 

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Yeah, I think it would be closer to ~8% over the long term...

 

This is much pessimistic! I have really an hard time imagining a year in which FFH might be more out of sync with the market than 2012. Well, in such a difficult environment and terrible year FFH still returned 6.5%. :)

 

giofranchi

 

“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.” - John Maynard Keynes

 

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Yeah, I am thinking since these guys all have a large portfolio of many stocks, you're essentially buying a large part of the market and it will probably beat s&p only by a slight margin..

 

Well, if they were bought below BV then you might get a higher return ~10%, but what if the market becomes overvalued and none of them trades at BV anymore? What would you buy then?

 

Yeah, I think it would be closer to ~8% over the long term...

 

This is much pessimistic! I have really an hard time imagining a year in which FFH might be more out of sync with the market than 2012. Well, in such a difficult environment and terrible year FFH still returned 6.5%. :)

 

giofranchi

 

“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.” - John Maynard Keynes

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Yeah, I am thinking since these guys all have a large portfolio of many stocks, you're essentially buying a large part of the market and it will probably beat s&p only by a slight margin..

 

Well, if they were bought below BV then you might get a higher return ~10%, but what if the market becomes overvalued and none of them trades at BV anymore? What would you buy then?

 

Well, that is not consistent with past returns. Take, for instance TPOU: in the file attached you see it returned 17.9% since inception vs. a 6.5% annual return achieved by the S&P500. Ok, I know that “past results are not indicative of future performance”… But, if nothing of significance has really changed, the fact the future is always unknown and unknowable doesn’t bother me much! :)

 

If the companies you know well and in which “you feel yourself entitled to put full confidence” get to be too pricey, you are left with only two options:

1) to find other companies in which in time you come to “feel yourself entitled to put full confidence”, and which are much more undervalued,

2) to hoard cash.

 

giofranchi

 

“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.” - John Maynard Keynes

 

2013-3-March-Monthly-Report-TPOI.pdf

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investment shouldn't be made too complex; but I also don't think it can be that simple

I am not a big fan of Munger

but He said sth like "if you think investment is very simple, you are very wrong" - I fully agree

 

Would you define the process of finding business in which you could “feel yourself entitled to put full confidence” an easy thing to do?! Then, your experience is much different from mine! ;)

 

giofranchi

 

“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.” - John Maynard Keynes

 

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Gio is right buying owner/operators at or below bv is the safest way to achieve 15 percent in the market.  The variable in achieving the 15 percent is having the ability/skill to allocate capital to the owner/operators that will compound capital at the fastest rate in the future. I think this is where qualitative skill comes in.  The key qualitative points are( their are more i dont have the time to write it all):

 

 

1.)  Whats the culture in the owner/operator business? Can you trust the owner/operator?Whats the essence/motives of the company?

2.)  Do they have a system of creating cheap leverage ( this would be a competitive advantage )

3.) Are they in big enough markets ( ideal is big but not too big. A big enough size niche)

4.) Does the owner/operator have skin in the game

 

I believe gio posted the floats/moats presentation. Its one of the most amazing presentations i have ever read and its personally made me money ( i bought groupon after reading the presentation) .  Looking for cheap leverage thats essentially a revolving fund is huge in building a future compound machine. Insurance float is obvious and also the most competitive. Royalty fee can also be framed as cheap leverage.  Having say a 30 yr fixed rate at a cheap rate is also one. Hedge funds are also cheap leverage.

 

Finding ways to obtain cheap leverage is absolutely essential as the backbone of any owner/operator compound machine.

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Isn't comparing the potential future returns of Fairfax and Brk problematic due to size?

 

Fairfax (mkt cap of $8 billion) has a much younger CEO and isn't workign with the sums that WEB (mkt cap of $264 billion) is using. I doubt BRK will annualize 15% for a decade even though it is somewhat undervalued...

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Looking for cheap leverage thats essentially a revolving fund is huge in building a future compound machine. Insurance float is obvious and also the most competitive. Royalty fee can also be framed as cheap leverage.  Having say a 30 yr fixed rate at a cheap rate is also one. Hedge funds are also cheap leverage.

 

Finding ways to obtain cheap leverage is absolutely essential as the backbone of any owner/operator compound machine.

 

I couldn't agree more!!  ;)

 

giofranchi

 

“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.” - John Maynard Keynes

 

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Based upon the BV metric the "best buys" today are: FFH, TPOU and LUK.  How do determine a FV for OAK as it is a high premium to BV?  A percentage of AUM?  Thx.

 

Packer

 

I think a sum of the parts analysis might be the best way to value OAK. The Brooklin Investor gets to a fair value of $66 per unit, while Broyhill Asset Management gets to $56 per unit. Please, find both analysis in attachment.

 

giofranchi

 

“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.” - John Maynard Keynes

Solid-As-An-OAK.pdf

solid-results-at-oak-but.pdf

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