FH Q3 Results

[giofranchi]

BH is no mini-BRK.  The only part of that description that fits is mini.  BRK has build a culture around treating folks fairly (the same with FFH).  BH has developed a reputation for hosing folks and providing the rewards to Mr. Biglari.  The BRK model is dependent upon purchasing business at or below IV in a non-combative way.  Buffet and Watsa never go hostile.  Who would want to sell there business to BH?  No one.  So if you have a choice, you go with someone else maybe even for a lower price.  I think that is downside to BH and you see it in the valuation.  Selling at a discount to other restaurant chains.  If you want a mini-BRK I think you have to look at other firms similar cultures not just appearance and structures (smoke and mirrors in my opinion).  I think an interesting question is would you Gio want to sell your business to Mr. Biglari or Mr. Watsa or Mr. Buffett?

 

Well, I don’t think this is the thread to discuss BH… That discussion goes on and on in the BH’s thread! Anyway, let’s see what Mr. Biglari will do with all his cash now… if he is successful in buying UNAM, maybe some of you will change your mind, or at least question your judgment about Mr. Biglari’s modus operandi. As far as I know, his only agenda is to make money, and there is not a single way he deals with management. In other words, he goes hostile with a management which is incompetent and needs to be replaced, while going along just fine with a management which deserves his trust. Behaving this way, I don’t see why he shouldn’t be successful in purchasing businesses at or below IV.

We will see.

 

giofranchi

 

[Packer16]

The reason I bring it up is my understanding of your approach is to buy compounders.  I think this is very good tax-efficient strategy but to be successful as Buffet has been you need businesses to buy at reasonable prices and the market a some point has to award you an at least in-line with market multiple.  I see how this can occur at most of your other ideas you mentioned (Lancaster, BRK, FFH and even GLRE).  But I think  BH even if they can find cheap hostile takeover candidate, the market will continue to attribute an "Biglari" discount to the stock price, a big weight other compounders do not have.  I could be wrong but BH is a too hard compounder for me.  Just my 2 cents.

 

Packer

[giofranchi]

Tombgrt,

I am very well aware of the bad results… They are in plain sight for everyone to see, right? So, I am not trying to hide them or pretend they do not exist…

 

I was on a more general level: Mr. Watsa has always repeated that FFH’s goal since 2011 has been to protect capital, not to grow it. So, everyone knew that! If you wanted something growing quickly, you should have looked elsewhere. As far as I am concerned, a large investment in a company that behaved very conservatively, made and still makes a lot of sense… yet, once again, my situation is mine and mine only. Your situation is yours and yours only. Each one of us has different financial situations and needs… how could the outcome be the same for everyone?! My firm’s equity is up 21% this year… despite the fact I hold a large investment in FFH…

So, to protect capital was and still is Mr. Watsa’s goal, while waiting for the right time to use all FFH’s financial power… this doesn’t mean that results will automatically be the ones Mr. Watsa hopes for or strives to achieve… and 2013 clearly has not been very kind so far…

 

Another thing I cannot understand is why people continue to compare Mr. Watsa with Mr. Buffett… We all know what Mr. Buffett does, exactly as we all know what Mr. Watsa does… and they are different things! You prefer Mr. Buffett? Very well then, invest in BRK! But it is completely useless to go on saying “if Mr. Watsa would do what Mr. Buffett does…”. He doesn’t! Period.

 

Last thing about cat events: from the conference call you can read that “current-period catastrophe losses increased modestly in 2013 relative to 2012”. Therefore, though clearly not a terrible year, 2013 until now has been less benign than 2012.

 

giofranchi

 

[giofranchi]

The reason I bring it up is my understanding of your approach is to buy compounders.  I think this is very good tax-efficient strategy but to be successful as Buffet has been you need businesses to buy at reasonable prices and the market a some point has to award you an at least in-line with market multiple.  I see how this can occur at most of your other ideas you mentioned (Lancaster, BRK, FFH and even GLRE).  But I think  BH even if they can find cheap hostile takeover candidate, the market will continue to attribute an "Biglari" discount to the stock price, a big weight other compounders do not have.  I could be wrong but BH is a too hard compounder for me.  Just my 2 cents.

 

Packer

 

Yes, I understand this. Yet, just look at IEP: right now it is selling at a primum to almost any other compounder that I know of...

 

giofranchi

[Packer16]

Maybe I missed it but does Ichan have as unbalanced compensation scheme as BH does?  I also think the buy insurance company and invest the float idea is also much harder than it looks.  Look at all the issues that FFH and GLRE is having with it.  BRK and MKL make it look easy but these guys are world class pros with lots of experience. 

 

Packer 

[giofranchi]

Well, only 9 months ago there certainly was an “Icahn” discount to IEP stock price: it was selling for 0.8xBVPS, while now it is selling for 2.18xBVPS… So, I think it is very difficult to know what kind of discount the market will apply to a stock and why. I am sure I cannot know and I don’t invest based on such a thing.

 

UNAM is an insurance company with a long track record of profitable underwriting, and I hope Mr. Biglari will treat its management exactly how Mr. Buffett treats the management he is fond of. Of course, I know I might be wrong, but Mr. Biglari is not stupid: he knows very well that profitable underwriting is not easy to achieve, and will not get in the way of a management that has proven to be very skillful at underwriting. UNAM’s portfolio of investments, on the other hand, is held almost completely in very short-term bonds, which yield very little. Here is where Mr. Biglari might add much value.

 

giofranchi

 

[gary17]

Gio

i'm curious , of your 'compounders' - IF you can only choose one to keep for the rest of your life - which one would you...

thx

[ERICOPOLY]

I remember they used to purchase out-of-the-money calls to reduce potential losses on their short position.

 

Have they ever mentioned why they stopped that practice?

[giofranchi]

Gio

i'm curious , of your 'compounders' - IF you can only choose one to keep for the rest of your life - which one would you...

thx

 

I cannot answer to your question… I am sorry! As I have said many times, investments must make strategic sense… And what makes strategic sense for my firm has already changed 2 or 3 times since inception in 2004… I guess it will change so many more times in the future, that I really cannot name an investment I think I will be satisfied to own forever… Also price is very important to me: at the right price, I will sell everything. I can tell you which are my 3 largest positions right now, because I think they will continue to be very large for some time:

1) FFH, 28.3% of portfolio

2) LRE, 20.7% of portfolio

3) BH, 10.9% of portfolio

 

giofranchi

 

[giofranchi]

I remember they used to purchase out-of-the-money calls to reduce potential losses on their short position.

 

Have they ever mentioned why they stopped that practice?

 

This is what Mr. Hussman is doing right now.

I ignored also FFH was used to employing that tactic…

 

giofranchi

 

[gary17]

Gio, are you  an investment firm or engineering firm? i had thought I read engineering at some point. 

[gary17]

Gio

i'm curious , of your 'compounders' - IF you can only choose one to keep for the rest of your life - which one would you...

thx

 

I cannot answer to your question… I am sorry! As I have said many times, investments must make strategic sense… And what makes strategic sense for my firm has already changed 2 or 3 times since inception in 2004… I guess it will change so many more times in the future, that I really cannot name an investment I think I will be satisfied to own forever… Also price is very important to me: at the right price, I will sell everything. I can tell you which are my 3 largest positions right now, because I think they will continue to be very large for some time:

1) FFH, 28,3% of portfolio

2) LRE, 20,7% of portfolio

3) BH, 10,9% of portfolio

 

giofranchi

 

Thanks - I have a lot of respect for Prem

I mean I followed him on IRE and it's now almost 30% of my portfolio (was 40%) -    I'm quite surprised that I see almost no discussion on IRE or see any board members that have invested in IRE. 

 

[giofranchi]

Gio, are you  an investment firm or engineering firm? i had thought I read engineering at some point.

 

AMiS AgenziaMilanoStrutture s.r.l. (www.agenziamilanostrutture.it) provides engineering services for the civil and infrastructure markets.

 

AMiF AgenziaMilanoFinanziaria s.r.l. manages our portfolio of investments.

 

AMiC AgenziaMilanoConsulting s.r.l. manages the operation of a for profit Master School inside the Politecnico of Milan (www.masterpesenti.polimi.it), and more recently (just started last week!) a financial newsletter (http://super-investitori.portafogliinvestimenti.it/categories/super-investitori) for Italian speaking investors.

 

Cheers!

 

giofranchi

 

[steph]

some observations about FFH.  I own FFH not for their underwriting skills and not even for their equity investments, but mainly for their amazing track record in fixed income, which for an insurer is still the main part of their portfolio. I was happy to see that underwriting is getting somewhat better. FFH has always had a 'special' way of managing their equity portfolio. To me there have been many strange decisions but somehow it is the way they feel at ease managing the equity portion and their track record has been very good. So that's fine for me. On the bond side there is not a lot to do these days, but volatility will come back which is what they are waiting for.

Many people on this board seem to think that FFH is defensive because they have hedged their equity positions. I don't agree. If you want an insurer which is not tied to the stockmarket, buy WTM or HCC, but don't buy FFH.  FFH is a market neutral hedge fund (at least regarding the equity side). They have mainly hedged with the Russel which is less correlated to their positions. They are not just hedging, they are taking a very active decision, selling what they think is expensive and buying what is cheap. Just look at what happened this quarter... I understand that there are risks and that they are not perfect, I just would probably be more at ease if they could just accept and say that they were completely wrong about their hedging.

 

I would never invest in GLRE. Just look at the management fees they pay Einhorn's hedge fund! This is just a way for Einhorn  to have stable capital. Unless you have no problem with 2% and 20% fee structures...

[jay21]

BH is no mini-BRK.  The only part of that description that fits is mini.  BRK has build a culture around treating folks fairly (the same with FFH).  BH has developed a reputation for hosing folks and providing the rewards to Mr. Biglari.  The BRK model is dependent upon purchasing business at or below IV in a non-combative way.  Buffet and Watsa never go hostile.  Who would want to sell there business to BH?  No one.  So if you have a choice, you go with someone else maybe even for a lower price.  I think that is downside to BH and you see it in the valuation.  Selling at a discount to other restaurant chains.  If you want a mini-BRK I think you have to look at other firms similar cultures not just appearance and structures (smoke and mirrors in my opinion).  I think an interesting question is would you Gio want to sell your business to Mr. Biglari or Mr. Watsa or Mr. Buffett?

 

Greenlight I think has more positive attributes but I am not sure how good his underwriting is.  Poor underwriting has offset investment gains since 2010.  He has done OK in 2013, CR<100 but has had a really benign years for cats.  We will see.  I have no problem with investment side but (like FFH) it is the underwriting which cam stunt growth. 

 

Packer

 

 

I sold GLRE awhile ago so I don't follow it closely, but I don't think they are that exposed to cats.  They are very selective there.  Also, the closest thing I have found to a mini-BRK is MKL.  I just wish they were a little more aggressive on the asset side sometimes.

 

The reason I bring it up is my understanding of your approach is to buy compounders.  I think this is very good tax-efficient strategy but to be successful as Buffet has been you need businesses to buy at reasonable prices and the market a some point has to award you an at least in-line with market multiple.  I see how this can occur at most of your other ideas you mentioned (Lancaster, BRK, FFH and even GLRE).  But I think  BH even if they can find cheap hostile takeover candidate, the market will continue to attribute an "Biglari" discount to the stock price, a big weight other compounders do not have.  I could be wrong but BH is a too hard compounder for me.  Just my 2 cents.

 

Packer

 

This post has me thinking.  Do we care if the multiple adjusts as long as the compounding is high?  Obviously, it will be a bonus, but we still get the high compounding.

 

Also, shouldn't we want discounts? It opens up another lever in the form of buybacks.  In this case though where it appears there could be an ethical issue, Biglari would probably try to raise capital himself and buy the shares rather than do share repurchases to benefit holders.

[wknecht]

I have been reading FFH’s quarterly reports for nearly 15 years.  That is a lot of quarterly reports my friends.  Upon reflection, I believe that the correlation to what I expect and what gets reported quarterly is running at about a (-)0.90!  In other words, you nearly have to be a masochistic to own it as I still do :)  But I guess that trait has to be at least a little present to be a value investor.  This wonderful correlation also makes it hard for the average analyst or portfolio manger that stays in their job around 3 years to ever get a handle on this company.

 

Oh well, 3 steps forward, 2 steps back in the slow drip of time arbitrage.

 

Cheers

JEast

Very very rough, but attached is a spreadsheet I use to estimate changes in FFH's book value per share. It focuses on changes in the investment portfolio, and ignores operating results and investments in associates etc. Might be slightly helpful, at least directionally.

FFH_BVPS_estimate.xlsx

[nwoodman]

Very very rough, but attached is a spreadsheet I use to estimate changes in FFH's book value per share. It focuses on changes in the investment portfolio, and ignores operating results and investments in associates etc. Might be slightly helpful, at least directionally.

 

Very helpful, many thanks

 

nwoodman

[giofranchi]

From the Q3 2013 Conference Call:

It doesn’t show in our statements, but we’re long term in building value.

--Mr. Prem Watsa

 

I think no one on the board believes Mr. Watsa could ever say such a thing, if he weren’t really convinced about it. And I think he knows his company very well, much better than anyone else.

 

Of course, if you think that Mr. Watsa & his team have all of a sudden become blind, or have gone crazy, this won’t be of much comfort to you… Let’s just say that I don’t think they have become blind, nor gone crazy. :)

 

giofranchi

 

[wknecht]

Very very rough, but attached is a spreadsheet I use to estimate changes in FFH's book value per share. It focuses on changes in the investment portfolio, and ignores operating results and investments in associates etc. Might be slightly helpful, at least directionally.

 

Very helpful, many thanks

 

nwoodman

Should be obvious, but I left off taxes which you will want to consider if you use this.

[tengen]

Of course, if you think that Mr. Watsa & his team have all of a sudden become blind, or have gone crazy, this won’t be of much comfort to you… Let’s just say that I don’t think they have become blind, nor gone crazy. :)

 

Not blind or crazy, but I have strong misgivings about Prem's entanglement with the BBRY "tar baby".

[Parsad]

Of course, if you think that Mr. Watsa & his team have all of a sudden become blind, or have gone crazy, this won’t be of much comfort to you… Let’s just say that I don’t think they have become blind, nor gone crazy. :)

 

Not blind or crazy, but I have strong misgivings about Prem's entanglement with the BBRY "tar baby".

 

I'm sure Prem at this point wishes he didn't have this entanglement either.  But it is what it is, and either he salvages it or it goes to zero.  He's not the type to give up, if that is one thing any shareholder should have learned by now.  If things go wrong, he'll pay the price as one of the largest shareholders, then learn from the mistake and move forward.  But he isn't going to give up, and this is scaring a lot of shareholders who can't stomach it.  Cheers!

[Alekbaylee]

 

 

I'm sure Prem at this point wishes he didn't have this entanglement either.  But it is what it is, and either he salvages it or it goes to zero.  He's not the type to give up, if that is one thing any shareholder should have learned by now.  If things go wrong, he'll pay the price as one of the largest shareholders, then learn from the mistake and move forward.  But he isn't going to give up, and this is scaring a lot of shareholders who can't stomach it.  Cheers!

 

Can't stomach it nor rationalize it.

It's hard to understand why Prem takes such big bets/risks when there seem to be less risky or more predictable situations. It's easier to follow Buffet or BBerkowitz in their thesis than Prem/FFH.

I think that explains the huge disappointement expressed today here.

[Parsad]

 

 

I'm sure Prem at this point wishes he didn't have this entanglement either.  But it is what it is, and either he salvages it or it goes to zero.  He's not the type to give up, if that is one thing any shareholder should have learned by now.  If things go wrong, he'll pay the price as one of the largest shareholders, then learn from the mistake and move forward.  But he isn't going to give up, and this is scaring a lot of shareholders who can't stomach it.  Cheers!

 

Can't stomach it nor rationalize it.

It's hard to understand why Prem takes such big bets/risks when there seem to be less risky or more predictable situations. It's easier to follow Buffet or BBerkowitz in their thesis than Prem/FFH.

I think that explains the huge disappointement expressed today here.

 

A lot of people thought Berkowitz was an idiot not long ago for his heavy investment in financials.  Very few people thought they were less risky or more predictable than even Blackberry when he made those investments, but over time as legacy issues disappeared, the investments became more likeable and investors assumed more predictable.  Cheers!

[Luckyone77]

Does anyone at FFH own a Mac? They seem to be a bit myopic and off base when it comes to technology. They'll probably prove me wrong but I just never saw the fascination with Dell or BBRY. Anyone who has owned a Mac or iPhone knows where the action is (or being in the ever changing tech world, was). The last time I had to order some PC's I called Dell. It was apparent that the glory days were over. It was such a hassle that we ended up just going to Best Buy and buying several computers there instead. Cheaper, easier and MUCH less hassle.

 

In regards to BBRY, just seems like another company who's shipped has sailed. A good friend who serves on several tech boards around the globe told me before the latest phone models that BBRY was toast as far as phones go. I should have listened to him. Probably a very good reason why Buffett always steered clear of technology.