value investing in italy - luiss guido...
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Department of Business & Management Chair of Structured finance
Academic Year
2017/2018
Value investing in Italy: The Berkshire Hathaway and Cattolica Assicurazioni case study
Relator Prof. Riccardo Bruno
Correlator Prof. Luigi Gubitosi
Candidate Eraldo Barosini
Id Number 686491
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Table of Contents
Introduction ............................................................................................................................ 3
Chapter 1. Value Investing .................................................................................................... 5
1.1. History and definition .................................................................................................. 5
1.1.1. The theoretical approach .................................................................................... 10
1.1.2. The practical methodology ................................................................................. 13
1.1.3. Main metrics and Graham’s 7 Golden rules ....................................................... 16
1.2. Investors or Speculators, Contrarian or Momentum? ............................................... 21
1.2.1. Value investors Vs Growth investors ................................................................. 22
1.2.2. Value investing and the long term historical cycles ........................................... 25
1.2.3. Index funds as best Investments ......................................................................... 28
Chapter 2. Main tractions and Warren Buffett’s holding .................................................... 32
2.1 Dividends, ESG and Active ownership ...................................................................... 32
2.1.1. Four Rules to earn via Dividends ....................................................................... 32
2.1.2. ESG: Equity performances and Active ownership ............................................. 38
2.2. Berkshire Hathaway Inc.: History and investing activity ......................................... 42
2.2.1. Berkshire Hathaway Shares A and B ................................................................. 46
2.2.2. Berkshire Hathaway Inc.’s main investments in 2017 ....................................... 52
Chapter 3. Value investing in Italy ...................................................................................... 55
3.1. FTSE-MIB Index stocks that pass the Buffett test .................................................... 55
3.1.1. Cattolica Assicurazioni and its acquisition ......................................................... 59
3.1.2. Cattolica’s share price and market capitalization ............................................... 66
3.2. Corporate governance as a key driver in Buffett’s model ......................................... 72
3.2.1. The value of corporate governance at Cattolica ................................................. 74
3.2.2. The unification of Ownership and Control at Cattolica ..................................... 80
Chapter 4. Conclusions ........................................................................................................ 85
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Summary .............................................................................................................................. 89
Appendix ............................................................................................................................ 105
Bibliography ...................................................................................................................... 129
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Introduction
The work addresses the relevance Value investing has had since its development and the
validity this approach keeps maintaining still today. Over the past 100 years, the Value
Investing strategy has proven to outperform returns on all major equity markets.
Unfortunately, I haven’t had any opportunity to attend a specific Value investing based
academic course, nor during my studies in Italy neither in Europe. In fact, the Value investing
strategy, that was developed in 1920 at the Columbia Business School in the United States
of America, is more common among American universities and companies. Therefore, my
project has the objective to spread the Value investing culture among Italian students and
demonstrate that the Italian companies have much Value to create for local and international
institutional investors.
The project, driven by a top-down analysis, is structured in four main sections:
Chapter 1 focuses on the history of Value investing and the role of its promoters: it presents
the principal theoretical concepts and practical applications that allow an effective
understanding of this strategy.
Chapter 2 contains the topics linking the general study of the strategy presented in Chapter
1 and the chosen technical analysis, which will constitute the last part of the dissertation: it
considers the main tractions and the investing company Berkshire Hathaway Inc., taken as
major example of Value investor.
Chapter 3 analyses Value investing in the Italian market with a focus on the acquisition of
Cattolica Assicurazioni: it attempts to understand the reasons why Berkshire Hathaway Inc.
preferred to invest in the Italian insurance company over other potential targets available.
Chapter 4, finally, will report my main conclusions derived from the analysis.
The first section, so, introduce Value investing under a historical perspective and point out
the main protagonists, Benjamin Graham and Warren Buffett. The difference between Value
investing and Growth investing, which is nevertheless more practiced, will be remarked.
Value investing proposes buying shares that the market offers at a significant discount
compared to their intrinsic value, with the objective to create value in the long term. Growth
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investing, conversely, leads the investor to prefer high priced stocks with growth prospects
above average in the short term.
In the second part, great attention will be brought towards dividends, ESG and active
ownership. These concepts, in fact, are all linked together and are fundamental to Value
investors. It has been studied that Environmental, Social and Governance (ESG) investing is
positively correlated to equity performances, and so dividends, and that an active ownership
is necessary to effectively influence corporate governance and business performances.
Berkshire Hathaway Inc., which was a Value investment itself because its share price at time
of Buffett’s acquisition in 1962 was undervalued, plays a central role to understand the
project’s analysis. It has got two different shares classes and a very wide and diversified
portfolio, which make Warren Buffett one of the most successful investors ever existed and
wealthiest man in the world.
The third Chapter, will focus on the FTSE-MIB companies which present metrics that
Warren Buffett as Value investor considers interesting. Main attention will be brought over
Cattolica Asssicurazioni which on the 6th of October 2017 was acquired by Warren Buffett’s
holding. This acquisition represented a Value investment as well because its share price was
undervalued. Berkshire Hathaway Inc. is the first shareholder of the insurance company and
it will be relevant to discover what drove the American holding to prefer the shares of the
nominated firm over others from the same industry, thanks to a comparative analysis. On the
one side, the study highlights the importance for Berkshire Hathaway to have the chance to
influence the corporate governance in the long run. On the other, the holding’s passive
approach, which seem to be less efficient, will prevail considering the switch in the
governance from a traditional to a monistic system adopted by the insurance company.
In conclusion, Cattolica Assicurazioni is a practical example of Italian company that can
create value for investors. Even if the acquisition could be properly evaluated just in a long
horizon, it is possible to affirm that until June 2018, it has created an upside for the
nominated Value investor. This project has discovered the presence of some contradictions.
If the ability to influence the corporate governance is generally maximising shareholders’
value for those investors who are actively involved in the company’s decision making
processes, then Cattolica Assicurazioni’s adoption of the governance monistic system is
providing for the opposite situation. The analysis will propose a surprising result.
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Chapter 1. Value Investing
1.1. History and definition
At the beginning of the 20th century, investors were driven mainly by speculation and
privileged information. However, in 1920, two Columbia Business School finance
professors, Benjamin Graham and David Dodd theorized a revolutionary and alternative
approach in their book “Security Analysis”, first edition in 1934, recognized as the bible of
Value investing. Graham believed that research was the key to determine the true value of a
stock. Together with Dodd he developed a methodology to identify and buy undervalued
listed securities. Through their “Security Analysis” principles, they provided the first rational
basis to apply when deciding to make an investment.
In 1928, the Columbia Business school professor began teaching his new approach. For
many years, Graham continually updated the reason-based methodology, and started
teaching his course to Wall Street professionals. The course was later taught by his successor
Roger F. Murray, who also edited several editions of “Security Analysis”. Although the class
was suspended when Murray retired in 1978, Value investing has been vigorously practiced
by generations of investors who had studied with Graham and Murray over several decades.
Some became legends in investment management, including Warren Buffett, Mario
Gabelli1, Glenn Greenberg2, Charles Royce3, Walter Schloss4 and John Shapiro5.
Value investing has proven to be the most performing investment strategy ever developed,
despite the many and unpredictable changes in the economy and financial markets during
1 Mario J. Gabelli is the Chairman and Chief Executive Officer of GAMCO Investors, Inc., the firm he founded
in 1977. He is a member of Barron's All Star Century Team. 2 Glenn H. Greenberg is the Managing Director and Founder of Brave Warrior Advisors, a privately-owned
Investment Advisory firm. 3 Charles Royce is the Chairman and Chief Executive Officer of The Royce Funds, a family of mutual funds
that focuses primarily on small-cap investing. 4 Walter Schloss founded the Walter and Edwin Schloss Associates and was named by Warren Buffett as one
of The Super investors of Graham-and-Doddsville, an article promoting Value investing publishes in 1984. 5 John M. Shapiro is President of AJC and Managing Director of Chieftain Capital Management, Inc.
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the last century. Value investors’ success over the last decades recognized not only the actual
powerful of the Value approach, but also its superiority over the most widely taught and
practiced modern investment theory, which is still incumbent today.6
Benjamin Graham (London 9 May 1894 – Aix-en-Provence 21 September 1976), as already
mentioned, was an influential investor whose research in securities laid the groundwork for
in-depth fundamental valuation used today in stock analysis by all market participants. Born
in a poor family that in 1895 moved to New York, he was a brilliant Columbia student who,
at the age of 20 years, decided to give Wall Street a shot, right after his graduation. From
1936 until he retired in 1956, his opened-end mutual fund, Graham-Newman Corp., gained
at least 14.7 % per year, versus 12.2 % for the stock markets. One of the best long-term
records on Wall Street history.
“When in Doubt, Stay Out” is one of the wisest tips for the stock market suggested by
Benjamin Graham. Graham developed five core principles:
• “A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an
actual business, with an underlying value that does not depend on its share price.
• The market is a pendulum that forever swings between unsustainable optimism – which
makes stocks too expensive – and unjustified pessimism – which makes them too cheap.
The Intelligent Investor is a realist who sells to optimists and buys from pessimists.
• The future value of every investment is a function of its present price. The higher the
price you pay, the lower your return will be.
• No matter how careful you are, the one risk no investor can ever eliminate is the risk of
being wrong. Only by insisting on what Graham called the Margin of safety – never
overpaying – it is possible to minimize the odds of error.
• The secret to your financial success is inside yourself. If you become a critical thinker
who takes no Wall Street “fact” on faith, and you invest with patient confidence, you can
take steady advantage of even the worst bear markets. By developing your discipline and
courage, you can refuse to let other people's mood swings govern your financial destiny.
In the end, how your investments behave is much less important than how you behave.”7
6 Columbia Business School, “The Heilbrunn Center for Graham & Dodd Investing - Value Investing History” 7 Graham, Benjamin, 1949 (revised edition), “Graham’s core principles”, “The intelligent investor”
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Benjamin Graham is, therefore, considered the undisputed father of Value investing, the
investment philosophy that considers the fundamental data of the stocks, as well as the
inspiring master of Warren Buffett, the greatest living investor. After the death of Benjamin
Graham in 1976, Warren Buffett wrote the “Financial Analyst Journal”, a short
remembrance of the man that, except his father, mostly influenced his life. He reports
Graham’s everyday hope to do “something foolish, something creative and something
generous”.
Warren Edward Buffett (Omaha 30 August 1930) is considered the best Value investor of
all times, nominated the “Oracle of Omaha”. He considers Benjamin Graham’s “The
Intelligent Investor”, the best book about investing ever written. His opinion on that is as
follows: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual
business insights, or inside information. What’s needed is a sound intellectual framework
for making decisions and the ability to keep emotions from corroding that framework. This
book precisely and clearly prescribes the proper framework. You must supply the emotional
discipline.”
The two main books in which Benjamin Graham expresses his thoughts and strategies are,
in fact, “The Intelligent Investor” and “Security Analysis”, considered the basis of the Value
investing. Through them he states that investors need to direct their investments towards
shares of companies with great financial stability, solid fundamentals and excellent growth
prospects for their business. His rational and logical approach to equity investment is
undoubtedly far away from the approach of most investors, but the performances recorded
by his management, and especially that of his disciple Buffett, have been extraordinarily
superior to those of the Standard & Poor 500 index, not only in the entity, but also for
consistency over time.
The advice of Graham, always followed by Warren Buffet, is to neglect the temporary
fluctuations of the market and focus on the long-term growth of winning businesses. This
advice could be summarized with the famous parable of Mr. Market, reported on his book
“The Intelligent Investor” which describes the irrationality that drives stock markets.
“Imagine that you own a small stake in an unlisted business that cost you $ 1000. One of
your partners, called Mr. Market, is very willing to help you. Every day he tells you what he
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thinks your share is worth and offers both to buy it and to sell it with an additional income.
Sometimes its value estimate seems plausible and justified by the expected business
developments and prospects for how you know them. Often, on the other hand, Mr. Market
allows his enthusiasm or his fears to seize him and the value he proposes seems foolish to
you.
If you are a prudent investor or a judgmental business man, will you allow Mr. Market's
daily valuation to determine your judgment of the $ 1000 invested in the company? Only if
you agree with him, or if you want to do business with him. You can be happy to sell them
when he offers you a ridiculously high price and equally happy to buy from him when the
price is low. But in the rest of the time you will be wiser to make yourself an opinion on the
value of your shares, based on the company's reports on its operations and financial position.
The real investor is in that condition when he owns shares of a listed company. He can take
advantage of the daily market price or leave it alone, as dictated by his own judgment and
inclination. He must take cognizance of important price movements, for which otherwise his
judgment will have nothing to work on.
Conceivably they may give him a warning signal which he will do well to sell. In our view,
such signals are misleading at least as often as they are helpful. Basically, price fluctuations
have only one significant meaning for the true investor. They provide him with an
opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a
great deal. At other times, he will do better if he forgets about the stock market and pays
attention to his dividend returns and to the operating results of his companies”.
To properly understand the parable, it is important to notice that even if the deal between
“you” and Mr. Market may have stable economic characteristics, the prices of Mr. Market
will not be stable at all.
Sad to say, in fact, “your” poor partner suffers from incurable psychological problems caused
by the “bipolar-depression” that makes him a person in perennial alternation of emotional
euphoric and depressive states. Sometimes Mr. Market feels euphoric and can only see the
favourable factors that influence your business. When it is in that state, the price it offers is
very high because it fears that “you” will tear its share, robbing it of imminent gains. At
other times he is depressed and, considering the future, he can only see trouble for “your”
business and for the world. In these moments, he will set prices very low, terrified by the
idea that “you” are about to give him “your” share.
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Mr. Market has another pleasant feature: he does not get offended if he is ignored. If today's
quotation is not of “your” interest, tomorrow he will propose “you” a new one. Each
transaction is at “your” discretion. And clearly, under these conditions, the more his
behaviour is driven by “bipolar-depression”, the better it is for “you”.8
It is commonly known, in fact, that the stock market is subject to large and recurrent
fluctuations. The intelligent investor should be interested in the possibility of taking
advantage of these movements. There are two main ways to do this:
1. Timing
Timing consists in the intent of predicting the future trend of the market, to buy when it
is expected to go up and sell when it is expected to go down; unfortunately, it is very
difficult to predict the correct future trend of the market and any intent falls within the
definition of speculation, which in many cases causes losses.
2. Pricing
Pricing consists of buying the shares when they are listed below their intrinsic value and
selling them when they rise above this value; the difference between the purchase price
and the intrinsic value constitutes the Margin of safety, which the wider the better – the
concept of Margin of safety will be analysed in the next pages. The Pricing approach
aims at taking advantage of market downturns, so to buy when the Price / Earnings ratio
drops heavily below the historically maintained average and as close as possible to
historical lows: since “reversion to the mean is the iron rule of financial markets”, as
John C. Bogle, founder of The Vanguard Group9 says, in the long run the quotation will
return to the previous level, so the average value that the Price / Earnings ratio has
8 Graham, Benjamin, 1949 (revised edition), “The Parable of Mr. Market”, “The intelligent investor” 9 Vanguard is one of the world's largest investment companies, offering a large selection of low-cost mutual
funds, ETFs, advice, and related services. The company started its operation on May 1st, 1975 and today
manages about $ 5.1 trillion in global asset under management. It counts about 180 U.S. funds (including
variable annuity portfolios) and about 208 additional funds in markets outside the United States, and more than
20 million investors, in about 170 countries. Whether you are an individual investor or a financial professional,
or you represent a corporate or institutional investor, you can benefit from our expertise, stability, and reliable
investment approach
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historically maintained – provided that the earnings remain the same. It is important to
try to see the market downturns as an opportunity to buy securities at low and
undervalued prices.
It is quite hard to predict the exact point where the market will stop going down, but
positioning an investment at a sufficiently undervalued price can ensure that sooner or later
that investment will become profitable. It is important to remember that a bear market always
ends with a bull market, and vice versa. A less ambitious form of pricing is simply to make
sure the investor is not paying too much for his shares; this can be useful in Growth investing,
where it is sufficient to make sure that the price paid is fair and reasonable – this depends
from the reason that Growth shares are generally overvalued and therefore risky, but if
bought at the right price they can make big profits.
1.1.1. The theoretical approach
“An investment operation is one which, upon thorough analysis, promises safety of principal
and an adequate return. Operations not meeting these requirements are speculative”.
Benjamin Graham
“Security Analysis”
Figure n.1.1
Margin of safety and buy / sell conditions
Source: Denker Capital
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Value investing is the art of buying shares that the market offers at a significant discount
compared to their intrinsic value, the actual and perceived value of a company. The discount
of the intrinsic value to the market price is the Margin of safety10, that allows an investment
to be made with minimal downside risk11. When the market price is lower than the discount
to the intrinsic value, Value investors finally decide to buy and engage in a long-term Value
investment, which hopefully will create value for them. Value investors look for companies
with cheap valuation parameters, typically low multiples of their profits or assets, for reasons
that are not justified in the long run. The reasons why the stocks present lower values may
be many, but the following are the most common:
• Disappointing short-term profits
If the quarterly results are less bright than the market expected, then the stock may fall
more than the company's business conditions would require.
• Markets fall
If the whole market collapses, then it is possible that there are excellent undervalued
companies. And usually, after a collapse, there will be a recovery. In those cases,
investors really need to get a lot of patience.
• Bad News
As a stock is not meeting analysts’ expectations, bad news can have a so negative effect
that push prices to low levels that cannot be justified by the company's real business
condition.
• Cyclical fluctuations
Some sectors perform better at certain stages of the business cycle. And sectors that are
not favoured by the economic cycle can present undervalued shares.
10 Margin of safety is a principle of investing in which an investor only purchases securities when the market
price is significantly below its intrinsic value. 11 Downside risk is an estimation of a security's potential to suffer a decline in value if the market conditions
change, or the amount of loss that could be sustained because of the decline. Depending on the measure
used, downside risk explains a worst-case scenario for an investment or indicates how much the investor stands
to lose.
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The economic theory contends that the market price converges at a point where the forces
of supply and demand meet, but shocks to either the supply side or demand side can cause
the market price for a good or service to be re-evaluated. The Value investing approach
requires a contrarian mentality12 and a long-term investment horizon. The contrarian
mentality is justified by the objective of Value investors to cautiously look for companies
with undervalued stocks: it is, indeed, an objective opposite to the dominant search for
Growth stocks, carried on by most market actors.
It is assumed that in the long run stocks will return to the intrinsic value, giving the investor
the opportunity to sell and earn the value from the investment. Intrinsic value is what
financial analyst and advisors call target price in the more technical financial research and
study they accomplish. In case of underestimation, financial intermediaries will predict that
the market price, or simply the price, will be reaching a value equal to the target price soon,
and this prediction will incentive Value investors to buy stocks of the underestimated firm.
Target price, is the analysts’ price that predicts the best outcome for the investment: target
prices influences market prices because if the target price falls because of a bad quote,
investors will sell the stock making the price fall and vice versa.
It is fundamental that Value investors understand the markets they invest in. Often investors
buy shares of companies that they do not understand, and that do not present the revenue
model or even the general dynamics of the sector to which they belong. But one of the most
important rules for those who want to invest in undervalued companies is precisely to focus
on the sectors and companies that they can properly understand. Only in those circumstances
investors can get an idea of what the true value of the investment could be.
Over the past 100 years, the Value Investing strategy has proven to outperform returns on
all major equity markets. As already underlined, there are different reasons why a stock
could be traded at a discount relative to its intrinsic value. The most common reason is a
disappointing short-term profit which often results in a substantial fall in the price of shares.
Often these disappointments can produce a strong emotional reaction to investors who sell
their stocks fearing further negative developments.
12 Contrarian mentality involves hunting for stocks that are seemingly not trading up to their value potential.
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Value investors recognize two things. Firstly, most companies are, by nature, long-term and
for this reason short-term profits are often small. Secondly, they recognize that, on average,
most company profits have a constant return over time. That is, in the long run, disastrous
profit falls are often reversed and, vice versa, growths of extremely strong profits tend to
slow down.
Value investing seeks to exploit the irrational behaviour of emotional investors. Over time,
emotion remains a constant feature of equity markets and while companies available to
investors change decade by decade, the human nature of investors themselves does not. Fear
and greed always remain present and often lead to incorrect investment decisions based on
perception and emotion rather than reality.
This creates an opportunity for long-term Value investors.
1.1.2. The practical methodology
“Long ago, Benjamin Graham taught me that Price is what you pay; Value is what you get.
Whether we are talking about socks or stocks, I like buying quality merchandise when it is
marked down”
Warren Buffet
The main idea is to evaluate companies with a different method from the traditional
Discounted Cash Flow (DCF) model to determine, with less uncertainty, the intrinsic value
of the analysed share and compare it with the market price.
The Discounted Cash Flow (DCF) model requires that the value of the company is given by
the sum of the future cash flows available for investors, discounted to the Weighted Average
Cost of Capital (WACC). The value calculated in this way is subject to great variability due
to the uncertainty in the assumptions underlying the calculation: the longer the time horizon,
the greater the uncertainty. Value investors, in fact, retain that the results based on DCF
model remain subject to considerable inaccuracy. And, even if verified through alternative
valuation techniques, such as multiple or sensitivity analysis, the outcomes are based on the
same foundation, the forecast of future cash flows, so the uncertainty problem is not solved.
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Value Investing is essentially based on three parameters, all needed to get the long-awaited
intrinsic value:
1. Book Value of Assets:
In case of long future existence of the company, it will be necessary to compute the
reproduction cost of the assets, which is the costs involved with identically reproducing
an asset or property with the same materials and specifications. The objective will be
reproducing the assets to keep competing in the market with same products, brands and
strategies. So, the Book Value of each asset in the Balance Sheet must be corrected to
obtain the replacement cost of the underlying asset, adding to the valuation the value of
assets such as licenses, trademarks and research know-how.
2. Earnings Power:
Earnings Power is the business' ability to generate profit from conducting its operations
and must be extrapolated from the Income Statement of the company. It is fundamental,
in the stocks’ analysis, to assess whether the underlying company is worthy of
investment. The value of Earnings Power is given by the value of the actual Earnings, so
business margins, discounted to the Weighted Average Cost of Capital (WACC).
3. Growth Value:
Growth value is the most difficult element to evaluate, due to the uncertainty of the
forecasts. Moreover, the growth in sales or profits adds little to the intrinsic value of the
company if the firm operates in a competitive market without barriers to entry. Without
the competitive advantage, in fact, the Growth Value equals the cost necessary to finance
the growth itself, since the margin on new potential revenues cannot exceed the Return
On Investment (ROI) rate. Therefore, the Growth does not add anything to the intrinsic
value of the company. Growth generates real value only if it produces excess returns at
the cost of additional capital required: this is only possible with a protected franchise, so
when the company enjoys a sustainable competitive advantage.
The intrinsic value of the company will be then compared with the market price on the stock
exchange, which very often reflects more the volatile trend of the markets than its substantial
value. The technique is therefore based on actual and verifiable data: Book Value of Assets
from the Balance Sheet, and Earnings Power, which reflects the business margins based on
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current profits, not on future hypotheses. The growth forecast, which is at the base of DCF
applications, has a much lower weight, and remains much more explicit.
More specifically, comparing the Book Value of Assets with the Earnings Power it can be
determined if the company’s management is creating value: if the Book Value of Assets
exceeds the Earnings Power, value is being destroyed, e.g. management is not exploiting the
potential of the assets. The company is working, for example, with an excess production
capacity or with the absence of competitive advantage. If the value of the Earnings Power
coincides with the Asset Value, there is absence of competitive advantage and perfect
competition: the company is not able to remunerate the capital over the Return On equally
risky Investments rate. Finally, when the value of Earnings Power is higher than the Book
Value of Asset, the company has a competitive advantage. The difference between the two
values provides the proof that the company’s management can achieve a return on assets
superior than that of its competitors. The franchise, to exist, must be sustainable over the
long term to guarantee future returns superior than the Weighted Average Cost of capital
(WACC) and a possible profitable growth.
Once the comparison between intrinsic value and market price has been completed, a due
diligence of the target company to define its competitive position, or determine its
sustainable competitive advantage on the market is reacquired, as mentioned above.
A company has a franchise when there are barriers to entry that alienate potential competitors
or make new entrants work at a competitive disadvantage. The advantage must be
identifiable and structural and derives exclusively from the presence of at least one of the
following four factors:
1. Protection, e.g. given by patents or licenses, which make entry difficult or impossible to
competitors;
2. Advantages due to the company's ability to produce at costs lower than those of its
competitors, e.g. production technologies and lower cost of labour or capital;
3. Captive customers, who are loyal towards the company because of the habitual purchases
or the high costs of searching for alternative products;
4. Economies of scale, that reduce the unit production cost as the quantity produced
increases, together with a captive customer base. In fact, only if accompanied by
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advantages on the demand side, the economies of scale can translate into advantages of
market share, lower costs and higher margins. Attention must be paid to the fact that the
cost advantages, due to technologies, production efficiencies or licenses or patents, are
short-lived, because they are easily replicable. It is therefore necessary that the company
not only distinguishes itself in the reduction of costs and in the maintenance of
customers, but also that it is able to innovate and acquire new customers, to maintain the
captivity and defend its market share.
Again, the value of growth can be considered if and only if the company enjoys a sustainable
competitive advantage. It is fundamental to keep in mind that Earnings Power higher than
Book Value of Assets does not necessary mean Buy: in case of a well-established company,
the market price will probably be higher than the intrinsic value.
1.1.3. Main metrics and Graham’s 7 Golden rules
“In the short run, the market is a voting machine but in the long run, it is a weighing
machine.”
Benjamin Graham
“Security Analysis”
Knowing the main metrics is a must for all investors. Once investors start using the metrics,
they should define their criteria over time to identify the undervalued securities. And this is
because the definition of the value of a company is not equally set and fixed but it can vary
from analyst to analyst. There are dozens of metrics that can be used to evaluate a stock, but
the following are some of the best used by Value investors to identify undervalued stocks:
• Price to Earnings Ratio (P / E)
The P / E ratio is the ratio for valuing a company that measures its current share price
relative to its per share earnings. It is useful to compare the stocks of the same sector. A
low P / E ratio means that the stock is cheaper than those with a higher P / E, but it is not
the only variable to consider. It is calculated by dividing the Price per share for Earnings
per share.
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• Price to Equity (Book Value) ratio (P / BV)
The P / BV ratio is calculated by dividing the current share price for the Book Value of
the company. A Book Value lower than one means that the security is traded at a value
lower than the company assets. Value investors use the P / BV ratio top identify shares
with a Margin of safety. So, share with a market price lower than the intrinsic value.
• Price to Earnings to growth ratio (PEG)
The PEG ratio is a stock's P / E ratio divided by the growth rate of its earnings for a
specified time, usually 5 years. The PEG ratio is used to determine a stock's value while
taking the company's earnings growth into account, and is considered to provide a more
complete picture than the P / E ratio.
• Debt to capital ratio
The debt to capital ratio is a measurement of a company's financial leverage. It is
calculated by taking the company's interest-bearing debt, including both short and long-
term liabilities and dividing it by the total capital. Total capital is all interest-bearing debt
plus shareholders' equity, which may include items such as common stock, preferred
stock and minority interest.
• Current ratio
The current ratio, also known as working capital13 ratio, is a liquidity ratio14 that
measures a company's ability to pay short-term and long-term obligations. It measures
the company's ability to make short-term commitments. The current ratio considers the
current total assets of a company, both liquid and illiquid, relative to that company’s
current total liabilities. Current Ratio is calculated by dividing Current Assets for Current
Liabilities.
13 Working capital, also known as net working capital, is the difference between a company’s current assets,
like cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods,
and current liabilities, like accounts payable. 14 Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the
calculation of metrics including the current ratio, quick ratio and operating cash flow ratio.
18
• Return on equity (ROE)
ROE represents the net income of the company as a percentage of the risk capital, so it
is equal to the ratio between net income15 and shareholder’s equity16. It measures the
company’s profitability by revealing how much profit the company can generate from
the shareholder’s investments.
The metrics listed above are a good starting point, but there are many other things to look at
to see if a stock is undervalued. As stated, one of the criteria used by some Value investors
is the sustainable competitive advantage over time,. This advantage can protect the company
from periods of general economic difficulties and from its competitors. A company that has
an important competitive advantage has a greater value than those who do not have it.
It is also important to know how the company is assessed, if administrators, auditors or top
management are buying or selling its securities. The activity of buying or selling securities
by directors, auditors or top management is called Internal Dealing17, which oblige buyers
or sellers to promptly and publicly inform the market about their shares.
Finally, there are times when markets are overvalued in general, and it is difficult to find
undervalued stocks. In these cases, the only thing to do is wait for things to change and so
for investors to be patient and wait for the real opportunity. Graham states that an intelligent
investor must be patient, disciplined and eager to learn; he must be able to harness his
emotions and think of himself. This intelligence is “a trait more of the character than of the
brain”, as Graham states in his book “The intelligent Investor”.
15 Net income is for the full fiscal year, before dividends paid to common stock holders but after dividends to
preferred stock. 16 Shareholder's equity does not include preferred shares. 17 Internal Dealing must not be confused with Insider Trading which identifies the crime carried out by those
who purchase / sale the securities of a listed company having confidential information available.
19
In his book, Graham enunciates the 7 Golden rules not to depart from in the choice of stocks.
1. Adequate size of the company
The company must be large, prominent and conservatively funded. Large means
focusing only on large-caps and mega-caps, which are more stable: clearly, referring that
concept to a market, e.g. the Italian market, which is dominated by small-medium
companies, then medium and large-caps will be adequate. Prominent refers to important
companies and industry leaders only, who benefit from a competitive advantage and
consequently suffer a little competition. Conservatively funded refers to companies with
low debt: it is important to look at the Debt / Equity and Long Term Debt / Equity ratios.
It must be considered that, in “The intelligent investor”, Benjamin Graham was
specifically referring to the American stock exchange of the early '70s companies, that
generally had revenues not less than $ 100 million, industrials, and not less than $ 50
million, utilities. The basic idea is to exclude small businesses, because they could be
subject to vicissitudes and anomalies above the average. So, there is no reason to include
this type of company in the portfolio of the Defensive investor. But, clearly, it is
important to make those revenue caps more actual.
2. Financial situation sufficiently robust
To evaluate strength and financial stability debt and liquidity must be considered. As for
the debt, low Debt / Equity and Long Term Debt / Equity ratio, typically less than 1, are
requested; total assets must be at least twice the debt – Debt / Equity ratio lower than
0.5.
A very high level of liquidity, even better if growing, combined with a low debt, lower
than total liquidity, is a considerable advantage in the negative periods of the economy.
A large cash flow is another positive factor. Two other important values to look at when
judging the financial strength of a company are the Current Ratio and the Quick Ratio18;
values greater than 2 indicate an enviable stability.
18 Quick ratio is an indicator of a company’s short term liquidity and indicates a company’s ability to meet its
long-term obligations with its most liquid assets: Quick ration = (current assets – inventories) / current
liabilities.
20
3. Stability of earnings
It is fundamental that the company can keep earnings per share stable. The performance
of listing a security is closely linked to the performance of earnings per share;
consequently, a profit per share stable is necessary to keep the listing stable. First it is
important to make sure that the company has made profit every year in the last ten years,
without ever having a deficit. Subsequently, the maximum decline in earnings per share
is measured in each of the past ten years compared to the average of the three years
preceding the one taken into consideration. No decline translates into 100% stability. A
more stringent test measures the maximum decline in earnings per share in the last ten
years compared to the previous year, and should not exceed the limit of two declines of
up to 5 % each in the last ten years.
4. Dividends
Uninterrupted payments for at least the last 20 years. It follows a paragraph entirely
dedicated to dividends. If referred to smaller countries, that rule could change.
5. Profit growth
The growth in earnings per share must have been at least 33 % in the last ten years; to
make this measurement using three-years averages at the beginning and at the end of the
period considered is requested. As an example, if to measure a 10 years’ growth from
2007 to 2017 the average earnings per share in the years 2005, 2006 and 2007, and then
the average earnings per share in the years 2015, 2016 and 2017 must be calculated.
Finally, the profit growth will be the measure between the two calculated average values,
which must be at least 33%, so a minimum increase of one-third of earnings per share
over the last 10 years.
6. Moderate Price / Earnings ratio
The current share price must not exceed 15 times the profits, considering the last three
years. Price / Earnings ratio must be lower than 15. A consistently low Price / Earnings
ratio indicates lower popularity and greater stability. The basic objective for the entire
portfolio is to have an overall Earnings / Price ratio, the inverse of the P / E, better than
the current rate of long-term high-rated bonds – e.g. P / E 13.3 = 7.5 % bond.
21
7. Moderate Price / Equity ratio
The current price must not exceed 1.5 times the Book Value (Price / Equity ratio). A
Price / Earnings ratio above 15 can be justified by a Price / Equity ratio lower than the
maximum recommended. Usually the Growth companies show an extremely high Price
/ Equity ratio; this derives from the great expectations that there are towards the company
and adds an important speculative risk factor. In negative periods, Growth shares lose
much of their value that they had accumulated in the period of great popularity.
All these rules are used to create a good Margin of safety, the already mentioned concept
introduced by Graham that serves to exclude purchases when a too large portion of the price
paid depends on the expected profits that are increasing in the future, a factor that greatly
increases the risks of investment.
Graham states that the investor will have to decide on this important issue by himself, after
carefully weighing the arguments in favour of investing in fundamentals or speculation.
Graham's final advice to the defensive investor is to buy a very diversified portfolio
consisting of the best stocks and bonds with a high level of rating.
1.2. Investors or Speculators, Contrarian or Momentum? Graham theorized a well-known distinction between Investors and Speculators. The former,
in fact, would belong to the category of analysts, who ensure an adequate return based on a
careful acquisition of the securities. The latter, to that of those who study more the timing of
intervention than the substance of the companies investigated. Many investors end up into
unexpected cracks or recessive periods, if not in the explosion of some speculative bubble.
Speculators, in fact, due to a perverse chain psychological effect, can drag the quotations of
the best stocks to the bottom, for months and years. In the following chapter, the distinction
will become clearer and more exhaustive. Moreover, investors can choose two different
investment strategies: Contrarian or Momentum.
22
Richard H. Driehaus19 developed Momentum investing as a strategy to exploit the most
recent market trends, while Warren Buffett, sponsors a Contrarian approach, whose
investment decisions deviate from the general direction of the markets. Contrarians, in fact,
think that the latest market trends are not realistic and focus on the long run to make profit.
Contrarian investing looks for stocks that are trading down their value potential. In 2004
investments in the metal industry’s stocks produced registered a loss, while the broader stock
market saw gains of 8 %, Contrarian investors who foresaw a bargain, invested in metals.
And they were right, since by the following year, profits for them were more than 30 %. The
main risk Contrarian investors face is the possibility they make the wrong prediction on the
value potential of stocks and experience declines instead of gains.
Momentum investors rely on the latest market results and follow the most popular
investment trends of the moment. They buy expensive stocks and wait for prices to rise
higher before selling for a profit. The greatest risk Momentum investors face is entering a
position at the wrong time, topically when the stock has already had its best trends. Clearly,
in that situation, Momentum investing will be subject to financial loss with no gains.
1.2.1. Value investors Vs Growth investors
“Value investors buy shares, even those whose intrinsic value shows little growth in the
future, on the belief that the current value is higher than the current price. Growth investors
instead buy securities, even those whose current value is low compared to their current price,
because they believe that the Value will grow fast enough in the future to produce a
substantial appreciation. The choice is not between Value and Growth, but between the
Value of today and the Value of tomorrow. Investing on Growth is a bet on corporate
performance that may or may not materialize in the future, while Value investing is mainly
based on analysing the current Value of a company”.
Howard Marks
“The Most Important Thing”
19 Driehaus Capital Management of Chicago, is one of the major small and medium-sized manager companies
and its success led the founder to be included in the Barron's All-Century Team, a group of 25 fund managers
that includes investment luminaries like Peter Lynch and John Templeton.
23
The discussion between investments based on Growth and Value, one of the oldest in
finance, can be summarized in a question: is it more profitable to hold high-growth stocks
or undervalued stocks?
During the last decades of the XX century, when detailed data on the performance of
financial markets and the power to calculate them were available, the Value Premium, the
extra return available to investors, was considered one of the pillars of finance. Observing
some data from last century, it emerges that the bottom 30 % of US securities have
experienced an average annual return of 13.7 % to investors in the period between 1926 and
1995; on the contrary, the top 30 % by price has experimented, with similar conditions,
average annual returns of 9.6 %. These data confirm the thesis of the triumph of Value
investing, surpassing by performance the most expensive stocks 91 % of the times over the
period observed. So, it is legitimate to ask what happened later.
Bearing in mind the possibility of an increase in the use of Value securities among investors,
which may have contributed to reduce the gap, the trend at the end of the nineties in favour
of fast-growing stocks based on technology and IT companies is quite peculiar. This
turnaround led to a margin of 12.9 % points in the period 1996-99 between the S&P Value
index and S&P Growth index, in favour of the latter. In the last seventeen years, the returns
conferred by the two approaches have alternated dividing the role of performing investing
model: the period from 2000 to 2007 was dominated by Value investing and subsequently,
until 2015, the S&P Growth index scored average upper results. In the last years, Value
strategy has turned the performances in its favour.
Perhaps, rather than talk of juxtaposition, there are always more investors who consider the
two approaches complementary, and Warren Buffett himself, recognizing the influence of
Charlie Munger’s opinion, said: “Growth and Value Investing are joined at the hip”.20
Below, the different roles of Value and Growth investors will become more explicit.
20 Associazione Italiana Family Officer (AIFO), “Value Investing e Growth Investing: approcci a confronto”
24
Benjamin Graham was one of the most important exponents of the Fundamental analysis,
the approach to financial investment that begins from considering the company's balance
sheet data to understand if it is appropriate to add its securities into the investing portfolio.
The other major investment school is the Technical analysis of Growth investing, which
bases its choices on the performance of the value of the stock over time. The experts of
Technical analysis are convinced that the market is always right and that the price contains
itself all the elements of a stock, explaining every information and every possible
development at the time known. Basically, they follow the market, so they buy because a
stock or the market has gone up and they sell because it has declined.
Growth investing, in fact, leads the investor to prefer stocks with growth prospects above
average in the short term. For this reason, the P / E and P / B rates of a growth investment
and, consequently, the price of the stock will be higher than the average, even if there is no
solid growth in profits.
On the contrary, the Fundamental analysis of Value investing proceeds from the postulate
that the stock exchanges, especially in the medium-short period, are excessively changeable
and unreliable and that in the long run, a good and careful evaluation of a budget always
ticks on contingencies and momentary whims of investors. Value investor are not short-term
investors, but professionals who cheerfully do not care about the fluctuations of prices and
historical series, Federal Reserve decisions or currency exchanges.
Value investors invest only in the businesses they understand and they can predict the
evolution of in the next 10 years, avoiding industries that are too competitive or subject to
continuous technological changes, thus avoiding the risk of short-term volatility, and
focusing not to lose the invested capital through the prolonged possession of the
participation.
So, Value investing is characterized primarily by the long period ownership, but the
discriminating factor is the choice of the shares to purchase. The Value investing approach
leads an investor to look for shares that have low prices in relation to Sales, Net Working
Capital and Book Value of the companies. Value investing involves the constant search for
companies that are solid but temporarily undervalued, waiting for the price of the shares to
re-align with the intrinsic value of the security.
25
1.2.2. Value investing and the long term historical cycles
“Value investors are not concerned with getting rich tomorrow. People who want to get rich
quickly, will not get rich at all. There is nothing wrong with getting rich slowly. Remember
we both sleep on the same mattress and eat the same food”.
Warren Buffett
Figure n.1.2
Annualized excess return over the period 1963 – 2017
Source: Patrick O'Shaughnessy, O'Shaughnessy Asset Management
Value investing has proven to outperform long-term historical cycles in the last 100 years.
The figure shows the annualized excess return over the period 1963 – 2017. Companies
with lower ratings pushed investor performance higher than companies with higher
valuations. This is nowadays a fact well known to most professional investors.
Strangely, however, this dynamic has not been reflected in the US market of mutual funds,
the biggest in the world. Reuters mutual fund team projected the total number of US Value
and Growth equity funds. Here are the results.
26
Table n.1.1
US Value and Growth equity funds, 1963 – 2017
Source: Reuters
Overall, there are about 70 % more Growth funds on the market compared to Value funds.
It is difficult to comprehend the reason of that result, given that Value investing has proven
to perform better than Growth investing over time.
Value investments are sometimes judged monotonous. Many companies pay boring
dividends, while others may have had low performances and be sold. Generally, Growth
investing is sexier than Value Investing. Buying Growth usually means focusing on
interesting and fashionable markets, revolutionary products and strong leap. It is much easier
to build a story around Growth stocks. As Wall Street earns commissions, it generally pushes
for the easiest products to sell. Mutual fund buyers can buy Growth stocks, while selling
Value investing is much more difficult. Most average investors need a history of investments
to rationalize their decisions.
And many times, Growth stocks outperform Value stocks over long periods of time. The
famous Value investor Joel Greenblatt21 once said, “If Value investing worked every day
and every month and every year, obviously, you would have an arbitrage, but it is not. It
works over time, but it is quite irregular”. The reason why Value investing works in the long
run is precisely because it often does not work in the medium run. In fact, Growth has
exceeded the Value most of the time in the last 5 and 10 years, but the tide is slowly starting
to turn in favour of Value.
21 Founder of the New York Securities Auction Corporation Former chairman of the board of Alliant
Techsystems.
27
Of course, not every single mutual fund invests in the same stock and time as top Value
investors, just as not all Growth funds only buy the most expensive stocks. They are simply
investment style boxes used based on portfolio characteristics. Moreover, these are not the
only two investment styles that work.
Although it has been easier to sell the Growth so far, this trend will not last forever. With
the launch of Smart beta funds, there will probably be a gap between Growth and Value
funds to shrink significantly as most of the Smart beta funds are out of balance with Value
stocks. Smart Beta investing combines the benefits of passive investing and the advantages
of active investing strategies.22
The main objective of Smart Beta is to obtain Alpha, lower risk, or increase diversification
at a cost lower than traditional active management and marginally higher than straight index
investing23. It attempts to build an optimally diversified portfolio. In effect, Smart Beta is a
mix of efficient-market hypothesis24 and Value investing. It defines a group of investment
strategies that highlight the use of alternative index construction rules to traditional market
capitalization-based indices. Smart beta focuses on capturing investment factors or market
inefficiencies in a rules-based and transparent way. The increased popularity of Smart Beta
is due to a desire for portfolio risk management and diversification along factor dimensions,
as well as seeking to enhance risk-adjusted returns, subjected to how much risk is necessary
to produce them, above cap-weighted indices.
22 Patrick O'Shaughnessy, O'Shaughnessy Asset Management. 23 Index investing is a passive strategy that aims to generate similar returns as a broad market index. Investors
use index investing to replicate the performance of a specific index – generally an equity or fixed-income index
– by purchasing Exchange-Traded Funds (ETF), marketable securities that track an index, commodity, bond,
or a basket of assets like an index fund. Among the advantages, index investing seems to outperform active
management over a long-time frame and eliminates many of the biases and uncertainties that arise in a stock
picking strategy. 24 Investment theory supporting the impossibility to “beat the market” because stock market efficiency causes
existing share prices to always incorporate and reflect all relevant information.
28
1.2.3. Index funds as best Investments
“Be greedy when others are fearful, and be fearful when others are greedy.”
Warren Buffet
Warren Buffett affirms that for an average investor the best way to make money is through
an investment fund indexed to the entire stock market. An index investment fund25 is a fund
that has the objective of reproducing the trend of an entire reference price list / index. These
funds include all the securities that make up an equity index (e.g. S & P500, NASDAQ,
DJIA) in the exact proportions to faithfully reproduce the performance of the entire market.
Therefore, investing in an index fund means owning the entire market.
The index funds are managed passively and therefore have lower operating costs compared
to the common actively managed fund. This simple investment strategy was spread by John
C. Bogle, founder of The Vanguard Group. John C. Bogle, born on May 8th, 1929 in Verona,
New Jersey, examines the historical performance and risk that has characterized the US stock
market, and analyses the sources of this return:
1. The fundamentals, represented by the profits of listed companies and dividends – the
only reliable and sustainable factors over the long term;
2. Speculation, episodic and spasmodic, represented by large fluctuations in the market
valuation of fundamentals.
25 An index fund is a type of mutual fund with a portfolio constructed to match or track the components of
a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide
broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific
rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the
state of the markets.
29
The following chart shows the trend of the Dow Jones Industrial Average Index from 1915
to June 2018.
Figure n.1.3
Dow Jones Industrial Average Index’s trend January 1915 - June 2018
Source: Dow Jones Industrial Average, 2018, “100 Year Historical Chart”
According to John C. Bogle, to invest successfully, it is necessary to be a long-term investor,
so that the value from the invested capital can be appreciated thanks to the growth of
fundamental values and the real economy. For this purpose, it is interesting to see how much
the US stock market, for example, has grown.
Between 1915 and 2018, the price of the Index has been considerably growing from $
1,798.45 to $ 24,415.84 and the average annual return on the stock market, adjusted to
inflation, has been constantly 7 %. For instance, based on the performance of the US stock
market in the last century, over a time horizon of a single year the return on the entire stock
market can fluctuate between -11.1 % and + 25.1 % on average. Over a ten-year horizon, the
yield may fluctuate between + 2.4 % and + 11.2 % on average per year. And over a period
of fifty years, yield stabilizes definitively, oscillating between + 5.7 % and + 7.7 % on
average annual – values extremely close to the historical average of 7 %.
The reason why the stock market provides a 7 % return over the long term is mainly due to
30
the growth in profits and dividends of listed companies., the return derived from dividends
and profits is identical to the 7 % return provided by the equity market itself.
There are three variables that determine the yield on the long-term stock market:
• Dividend yield (%)
• Rate of profit growth
• Change in the Price / Earnings ratio, speculative component of the market.
These three factors explain and determine the return on the stock market. These factors can
also be used to predict the actual performance and future performance of the stock market in
an approximate manner.
John C. Bogle argues that a good portfolio based on indexed funds must be well balanced
between stocks and bonds, which can be purchased individually or also held through an
indexed bond fund, which collects all the securities of the US bond market. The balance
must depend on the available time horizon, on risk appetite, on objectives, ranging from 50
% shares to 50 % bonds, to 80 % shares, 20 % bonds.
John C. Bogle supports many advantages of index funds compared to actively managed
investment funds. He often compared the return on an ordinary managed fund and the return
on a hypothetical portfolio composed of index bond fund, 35 %, equity fund, 65 %, indexed
to the S&P 500. Between 1947 and 1997, $ 10,000 invested in the managed fund would have
become $ 1,080,000 – with a growth of 10,700 %; $ 10,000 invested in the indexed portfolio
would have become $ 1,615,000 – with a growth of 16,050 %. Bogle has amply
demonstrated how the simplicity of indexed funds ensures higher rates of return than those
provided by most managed funds. Only 35 actively managed funds survived from 1947 to
1997, and of these only two have guaranteed returns higher than those provided by the
indexed portfolio.
The main advantage of passively managed index funds is the very low management costs.
These extremely low management costs play a fundamental role in determining the
superiority of the return on index funds compared to the return on actively managed funds,
which are much more expensive. The total operating costs of a managed fund amount to an
31
average of 1.1 %, while for indexed funds the management costs do not exceed 0.2 %. This
advantage significantly influences the results. Therefore, according to Bogle it is necessary
to select only funds with extremely low management costs. Warren Buffett, in fact, argues
that the excessive costs of a managed fund on average cut between 10 % and 20 % of total
return.26
26 Investitore intelligente, 29 December 2016, “Il miglior investimento in assoluto”
32
Chapter 2. Main tractions and Warren Buffett’s holding
2.1 Dividends, ESG and Active ownership
2.1.1. Four Rules to earn via Dividends “The prime purpose of a business corporation is to pay dividends regularly and, presumably,
to increase the rate as time goes on.”
Benjamin Graham
“Security Analysis”, 1934
Many people invest in shares of companies that pay substantial dividends with the aim of
achieving a steady and regular return, and can reinvest their profits. Most dividend-oriented
investors focus purely on the purchase of securities that pay high fixed coupons; however,
the largest gains can be obtained from shares of companies that over time, year after year,
increase the number of dividends.
It is possible to imagine a company that can be bought at $ 100 per share, which at the time
of purchase pays an annual coupon of $ 5 corresponding to 5 % of the initial investment. For
10 consecutive years, the company increases the dividend at a rate of 20 % per annum: in
the tenth year, the dividend will be equal to $ 31 per share, or 31 % of the initial investment.
In short, it is possible to deal with a dividend that grows year after year, and if the first year
the dividend is equal to 3 % of the invested capital, the following year it will possibly be 4
% or more, in continuous expansion.
In general, dividend-oriented investors should pay attention to the following four rules:
1. Quality
A very high dividend may be attractive, but it is not the only thing that needs to be
considered. A long-term investor must be sure that the company is able to maintain the
size of the dividend; in other words, the dividend must be sustainable. The company
must be well established, financially stable and mature. Value investors must be able to
select investments that offer more stability in long run, even if at the cost of missing a
33
greater gain in the short term. A value to which every investor should pay attention is
the Pay-Out ratio, which is the ratio between distributed dividends and Total Net Profit
– a Pay-Out ratio of 20 % indicates that the company under analysis distributes 20 % of
its profits as dividends. An excessively high Pay-Out ratio may not be sustainable in the
long term, since a small reduction in Total Net Profit is sufficient to reduce the dividends:
generally, at the first crisis or recession, the investor will see his coupon reduced. On the
contrary, it is curious to see that the highest dividend-paying portfolio outperformed the
other Dividend-Yield baskets with annualized returns of 20.8% over the observation
window refereed to the S&P 500 Energy sector dividend yield. It outperformed the sector
index over 1999 through 2011, excluding 2008 and 2009. Quartile 1 was the second-best
performing basket, producing annualized returns of 18.8%.
Figure n.2.1
S&P 500 – Energy stocks, August 1996 through December 2011: Dividend Yield
Source: Credit Suisse Quantitative Equity Research
Quartile 4 contains the highest dividend-paying stocks. The no dividends-paying
portfolio generated an annualized performance of 16.6 % versus the index’s annualized
34
return of 7.2 %. Quartile 1, the second best performing portfolio, had lower volatility
and produced a slightly higher Sharpe ratio than the no dividends-paying basket.
Figure n.2.2
S&P 500 – Energy stocks, August 1996 through December 2011:
Dividend Yield and Pay-Out
Source: Credit Suisse Quantitative Equity Research
Unlike other regions, high yield, high Pay-out was the top performer in the S&P 500. It
outperformed the energy sector index consistently, generating excess returns every year
from 1999 to present. The no-dividends portfolio had the top cumulative performance as
recently as August 2008, before falling behind high yield, high Pay-out. The top Yield
and Pay-out portfolio outperformed the highest-Yield portfolio, from the yield-only test,
by an annualized 0.2 %. The high yield, high Pay-out portfolio generated an annualized
return of 20.6 %. 27
It is necessary to focus on high quality companies, which have demonstrated a long
history of stability, growth and profitability. Invest only in companies that have paid
27 Credit Suisse, 11 January 2012, “Global Equity Research Quantitative Analysis, Energy: Global Dividend
Strategy”
35
dividends every year for the past 25 years without a single reduction would mean
investing in high quality businesses, but it cannot become the rule. Equity stocks that
have a long history of constant dividend growth, over the last 25 years or more, are called
Dividend Aristocrats, aristocratic dividends, and have historically outperformed the S &
P 500 by 2.8% per annum in the last 10 years.28
Figure n.2.3 S&P 500 Dividend Aristocrats compared to S&P 500 over the last 10 years
Source: S&P Dow Jones Indices, 7 June 2018
2. Discounted price
In Value Investing the Dividend Yield is one of the most important values to look at to
understand if the price of a stock is low, undervalued and therefore discounted compared
to the intrinsic value. A high Dividend Yield is therefore an indication of a good deal –
provided that the company is a quality company. It is better that the Dividend Yield is
high thanks to a momentary undervaluation of the stock rather than due to a high and
unsustainable Pay-out Ratio.
The chart below shows how an investment in each portfolio as of January 1928 would
have grown through December 2017, with dividends reinvested. Over the full period, all
portfolios of dividend payers outperformed the portfolio of non-dividend payers.
28 S&P Dow Jones Indices, 7 June 2018, “S&P 500 Dividend Aristocrats”
36
Generally, higher dividend-yielding quintiles outperformed lower-yielding quintiles. As
shown in Table 1, the volatility of the dividend payers, as measured by annualized
standard deviation, was significantly lower than that of the non-payers. This is evident
in the relatively higher Sharpe ratios of the dividend payers.29
Figure n.2.4
Hypothetical Growth of 1 Million from January 1928 to December 2017
Source: Kenneth R. French and Centre for Research in Security Prices (CRSP),
1 January 1928 to 12 December 2017
3. Growth
It is necessary to invest in companies that have a history of solid and constant growth (in
terms of profit and turnover). If a company has maintained a high growth rate for many
years in a row, it will most likely continue to do the same in the future. Equity stocks
characterized by steady growth in long-term dividends outperformed companies with
unchanged dividends of 2.4 % per year from 1972 to 2013; the following chart shows in
purple the companies whose dividends grow steadily over the long term, in blue
companies that leave the dividends unchanged and in green the companies that do not
pay dividends.
29 Heartland Advisors, 2017, “Dividends: A Review of Historical Returns”
37
Figure n.2.5
S&P 500 Index: Dividend Growers Have Outperformed Over Time Hypothetical performance of $100 invested in each of the five strategies (1972–2013)
Source: Ned Davis research, 12/31/13
Therefore, it would be logical to sell the shares that reduce or eliminate dividends: these
securities have on average generated a Yield of 0 % from 1972 to 2013. It is important
to evaluate the company's growth potential, its financial condition and profitability, its
ability to continue to expand and increase dividends; investors, in fact, don’t buy shares
just because the dividend is high.
4. Volatility
Look for companies in which people usually invest during negative periods: the listing
of these companies is usually more stable and less subject to excessive variations. It is
preferable to invest in equity securities that demonstrate low volatility and low beta. The
S & P index consisting only of extremely low volatility stocks (the S & P Low Volatility
Index) outperformed the S & P 500 by 2% annually from 1990 to 2011.
38
Figure n.2.6
Relative Performance of the S&P 500 low Volatility Index and the S%P 500
Source: Standard & Poor’s 30 September 2011
2.1.2. ESG: Equity performances and Active ownership
“If you get to my age in life and nobody thinks well of you, I don't care how big your bank
account is, your life is a disaster”.
Warren Buffett
The “good and responsible shares”, those that show off the best Environmental, Social or
Governance (ESG) ratings, are rewarded by the market more than others. This is revealed
by the first European study on the correlation between ESG and performance ratings,
39
conducted by the Politecnico di Milano School of Management30 and by Banor SIM31 with
the same methodology used by the Harvard Business School’s professor George Serafeim
to analyse the US market.
Figure 2.7
Cumulative return on the Stoxx® Europe 600 index securities, based on the ESG rating
Source: Banor SIM S.p.A & Politecnico Milano 1863 School of Management
30 The Politecnico di Milano School of Management, established in 2003, welcomes the multiple research,
training and consulting activities in the fields of economics, management and industrial engineering that the
Politecnico carries out through its various internal structures and consortium. 31 Banor SIM, present on the market since 1989 as a vehicle for the private banking activities of a group of
banks in northern Italy, was taken over in 2000 by a group of private investors and managers led by
Massimiliano Cagliero, the current CEO. The goal of Massimiliano Cagliero and its partners was to create an
independent private banking in Italy that would implement the principles of Value investing. Today it is one
of the leading Italian securities brokerage companies and specializes in capital management and investment
advice.
40
The research focused on the performance between 2012 and 2017 of the companies that are
part of the STOXX Europe 600 index32, with a fixed number of 600 high, medium and low
capitalization companies from 17 European countries33. The shares considered were 882,
because over the six years in which the analysis was carried out, the composition of the
STOXX 600 has periodically changed.
For each security, data on stock exchange prices, operating performance reported in financial
statements and non-financial reporting on ESG parameters were collected, based on
Thomson Eikon ESG data with their 424 annual indicators, grouped into ten categories and
available for each company. The basket does not include securities that do not fall within the
ESG rating, e.g. arms manufacturers.
The results reward precisely the shares of the most responsible companies in terms of
Environmental, Social and Governance. The securities belonging to the basket of companies
with the highest ESG rating are those that perform better and that show both higher revenue
growth, better margins and dividend yield. So, the study reveals that the integration between
the ESG indicators and the classic economic-financial considerations used by analysts in the
Value investing approach is the best strategy, in terms of returns, to create efficient portfolios
and secure a competitive advantage in the long-term. In terms of volatility there are no major
differences between good and non-good securities.
All this could create a virtuous circle, as noted by Giancarlo Giudici of the Politecnico di
Milano School of Management: integrating criteria of Environmental, Social sustainability
and Governance with the traditional models of value-based financial analysis can give
advantages to both managers and investors.
“In fact, it is important to recognize that there is a correlation between better performance
and adherence to ESG principles - emphasizes Massimiliano Cagliero, founder and CEO of
Banor SIM - even if today in the United States this correlation is also driven by flows. The
32 The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset
of the STOXX Global 1800 Index. 33 Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
41
hope is that all this trigger a virtuous circle in the real economy, with a push on listed
companies to adapt to attract investors”. To conclude who invest in “good and responsible
shares”, on the stock market, eventually discovers that becomes even richer.34
Having analysed the positive performance effects produced on equity by ESG investing, it
is necessary to introduce the Active ownership, a very actual and interesting concept that
aims at exercising the rights and influence investors are granted. In fact, institutional
investors feel very responsible in terms of ESG-related issues when they get to invest. It has
been studied that through proxy voting and active engagement, companies could better their
ESG behaviour, which is correlated to equity performances and, consequently, reduce costs
and increase competitiveness and profitability. Therefore, active ownership is a very
effective practice to maximize shareholder value and improve long-term returns.
In practice, through active ownership, investors can:
1. Secure higher revenue growth, better margins and Dividend Yield and so improve the
risk/return profile of their investments;
2. Produce positive ESG impacts and enhance their reputational level: engagement involves
the creation of a positive dialogue between institutional investors and investee companies
to improve ESG behaviour and performance in the long run;
3. Better comply with the United Nations Principle for Responsible Investment:35
“As institutional investors, we have a duty to act in the best long-term interests of our
beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate
governance (ESG) issues can affect the performance of investment portfolios. We also
recognise that applying these Principles may better align investors with broader
objectives of society. Therefore, where consistent with our fiduciary responsibilities, we
commit to the following:
34 Banor SIM SpA & Politecnico Milano 1863 School of Management, 3 May 2018, “La relazione fra rating
ESG e performance di mercato: uno studio sui titoli dell’indice Stoxx® Europe 600” 35 RobecoSAM, August 2016, “Governance and Active Ownership: using shareholder rights to maximise
shareholder value”
42
Principle 1: We will incorporate ESG issues into investment analysis and decision-
making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership
policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which
we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the
investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the
Principles.
Principle 6: We will each report on our activities and progress towards implementing the
Principles.
The Principles for Responsible Investment were developed by an international group of
institutional investors reflecting the increasing relevance of environmental, social and
corporate governance issues to investment practices. The process was convened by the
United Nations Secretary-General. In signing the Principles, we as investors publicly
commit to adopt and implement them, where consistent with our fiduciary
responsibilities. We also commit to evaluate the effectiveness and improve the content
of the Principles over time. We believe this will improve our ability to meet
commitments to beneficiaries as well as better align our investment activities with the
broader interests of society. We encourage other investors to adopt the Principles.”36
2.2. Berkshire Hathaway Inc.: History and investing activity
Berkshire Hathaway Inc. is one of the holding companies that registers more investors each
year, and not by chance one of the largest companies in the world; after all, its CEO is Warren
Buffett, one of the most successful investors ever existed. The total turnover of Berkshire
Hathaway Inc. is around $ 150 billions, and the estimated market value is about $ 400
thousand. It is at the top of the Fortune 500 companies, as reported in the top 10 list below.
36 United Nations Principles for Responsible Investment, “Six Principles for Responsible Investment”
43
Table n.2.1
Top 10 Fortune 500 companies
Source: Fortune 500, 2017
Fortune 500 classifies Berkshire Hathaway Inc. as the second-best company in the world in
2017 in terms of revenues, which in its case are equal to $ 223,604 millions.
In the last 40 years, the company has achieved a growth of around 20 % for all its
shareholders, investing large capital and with minimal borrowing. After the financial crisis,
performance has improved steadily. From 2000 to 2010 it had a Yield of 76 %, higher than
the -11 % of the main index of the United Stes of America, S&P 500. The table below shows
that Berkshire Hathaway has generally proved to outperform the S&P 500 Index over the
period from 1965 to 2017.
44
Table n.2.2
Berkshire’s Performance Vs the S&P 500
Berkshire Hathaway Inc., 2017
Initially, Berkshire Hathaway Inc. had essentially an insurance core, but over the years it
expanded with a portfolio that covers space in various sectors and in many companies.
45
The history of Berkshire Hathaway Inc. originated in 1839, when it was still a textile
company, founded by Oliver Chace with the name of Valley Falls, in Rhode Island. In 1929,
the company was merged with the Berkshire Cotton Manufacturing Company founded in
1889, Massachusetts. Years later, in 1955, the company merged again and finally became
Berkshire Hathaway Inc., and had 15 plants with over 12,000 employees, and $ 120 million
revenues.
Buffett arrived in 1962, and started buying Berkshire Hathaway Inc.’s shares. He bought so
many of them that take charge and control of the company and quarrel with the Stanton
family37. It was a Value investment itself since its shares were undervalued: analysts
calculated the stock was worth $ 19.46 a share, but it could be bought for a mere $ 7.50.
Since 1967, Buffett began to move the business in the insurance sector, and already at the
end of the seventies Warren Buffett acquires a stake in GEICO38, which is still part of the
core business of the Berkshire operations. 1985 is the year of the closure of the Berkshire
Hathaway Inc.’s textile department.
Speaking about actual data, Berkshire Hathaway Inc. closed the first negative quarter of
2018 in red for the first time in nine years. Due to the implementation of new accounting
rules that require gains or losses on unrealized investments, the first quarter closes with a
red of $ 1.14 billions: this is the first loss since 2009.
The operating profit, which excludes some investments, rose to $ 5.29 billions from $ 3.56
billions in the same period last year. Revenues fell to $ 58.47 billions from $ 64.37 billions
in the same period of 2017. Buffett had warned in February on the impact that the new
accounting rules would have had on the financial statement: changes that “will distort data
37 In 1962 Warren Buffett began buying shares of an undervalued Berkshire Hathaway Inc. Eventually Buffett
was aware of that poor performances and bankruptcy risks of the textile business. In 1964 Seabury Stanton,
President of Berkshire Hathaway Inc., made a verbal tender offer of $ 11.5 per share for the company to buy
back the Buffett's shares sold buy his brother. Buffett agreed to the deal. The tender offer received in writing,
was for only $ 11.375 and this made Buffett so angry, that instead of selling at the slightly lower price, he
decided to buy more of the stock to take control of the company and fire Stanton. 38 The Government Employee Insurance Company is a private car insurance company wholly owned by the
Berkshire Hathaway Inc. since 1996. GEICO was founded in 1936 by Leo Goodwin and his wife Lillian
Goodwin to provide insurance to state employees and their families.
46
on net profit and will often mislead investors” he had said. Buffett also explained that
operating results are a better barometer than company performance, in part because
Berkshire's $ 170 billion equity portfolio can fluctuate from quarter to quarter.
Operating profit, which does not include these changes, rose 49 % to $ 5.29 billion during
the first quarter, while insurance underwriting posted a profit after a difficult 2017. A 16 %
increase in the Geico insurance company’s revenue, has helped the company to make a
technical profit. Geico was favoured by the increase in rates which boosted the premiums.
The rail sector, mainly represented by Bnsf Railway Co., also recorded an increase in profits
thanks to the increase in fuel prices. Service, transport and energy companies recorded an
increase in profits of 31 % in the first quarter of 2018.39
For the sake of curiosity and in relation to the focus of this work, Berkshire Hathaway Inc.
is also present in Italy, with an insurance service. BHItalia® is a registered trademark of the
Italian branch of Berkshire Hathaway International Insurance Limited (BHIIL). The parent
company of the Berkshire Hathaway International Insurance Limited is obviously Berkshire
Hathaway Inc., based in the United States of America. Many products are offered for cars,
motorcycles, boats and other types of vehicles.40
2.2.1. Berkshire Hathaway Shares A and B
Berkshire Hathaway Inc.’s shares are listed at the New York Stock Exchange (NYSE).
There are only two types of Berkshire Hathaway Inc.’s shares:
1. Berkshire Hathaway Inc. Class A Shares (BRK.A)
2. Berkshire Hathaway Inc. Class B Shares (BRK.B)
The main difference between the Berkshire Hathaway Inc. Class A and the Class B shares is
first and foremost the price. Due to the price difference, Class B shares offer greater
flexibility for investors and provide a potential tax benefit. Warren Buffett said that Class A
shares will never have a stock split, because he believes that the high price of the stock
attracts investors focused on long-term profits rather than short-term price movements.
39 Il Sole24Ore, 5 May, 2018, “La holding di Warren Buffett in rosso per la prima volta negli ultimi 9 anni” 40 BHItalia, Gruppo Assicurativo Berkshire Hathaway
47
1. Berkshire Hathaway Inc. Class A Shares (BRK.A)
Figure n.2.8
Berkshire Hathaway Inc. Class A shares quote (BRK.A)
Source: New York Stock Exchange (NYSE), 14 June 2018
2. Berkshire Hathaway Inc. Class B Shares (BRK.B)
Figure n.2.9
“Berkshire Hathaway Inc. Class B shares quote (BRK.B)”
Source: New York Stock Exchange (NYSE), 14 June 2018
48
As announced, the Berkshire Hathaway Inc.’ A and B shares have very different values: as
of 14 June 2018, Class A shares present a value of $ 289669.90, while Class B shares present
a value of $ 192.50. The price difference is, so, equal to $ 289477.40.
Below, it is reported a Memo on the “Comparative Rights and Relative Prices of Class A
and B Stock”, that is shared by Berkshire Hathaway Inc.’s Chairman Warren Buffet.
• Comparison of Berkshire Hathaway Inc. Class A and Class B Common Stock
“Berkshire Hathaway Inc. has two classes of common stock designated Class A and
Class B. A share of Class B common stock has the rights of 1/1,500th
of a share of Class
A common stock except that a Cs B share has 1/10,000th of the voting rights of a Class
A share (rather than 1/1,500th of the vote). Each share of a Class A common stock is
convertible at any time, at the holder’s option, into 1,500 shares of Class B common
stock. This conversion privilege does not extend in the opposite direction. That is,
holders of Class B shares are not able to convert them into Class A shares. Both Class A
& B shareholders are entitled to attend the Berkshire Hathaway Inc.’s Annual Meeting
which is held the first Saturday in May”.
• The Relative Prices of Berkshire Class A and Class B Stock
“The Class B can never sell for anything more than a tiny fraction above 1/1,500th of the
price of A. When it rises above 1/1,500th, arbitrage takes place in which someone —
perhaps the NYSE specialist — buys the A and converts it into B. This pushes the prices
back into a 1:1,500 ratio. On the other hand, the B can sell for less than 1/1,500th the
price of the A since conversion doesn’t go in the reverse direction. All of this was spelled
out in the prospectus that accompanied the issuance of the Class B. When there is more
demand for the B (relative to supply) than for the A, the B will sell at roughly 1/1, the
price of A. When there’s a lesser demand, it will fall to a discount. In my opinion, most
of the time, the demand for the B will be such that it will trade at about 1/1,500th of the
price of the A. However, from time to time, a different supply-demand situation will
prevail and the B will sell at some discount. In my opinion, again, when the B is at a
discount of more than say, 1 %, it offers a better buy than the A. When the two are at
49
parity, however, anyone wishing to buy 1,500 or more B should consider buying A
instead”.41
The stock, from 1996 to today, has had a steady growth. One of the most important factors
to consider in making forecasts on Berkshire Hathaway Inc.’s shares is the release of official
financial statements (annual, half-yearly, quarterly) that can provide important information
in this regard: objectives for future years, possibility of acquisitions, enlargements etc. It is
therefore important to always follow very closely the possible mergers with other corporate
entities.
To predict the performance of the Berkshire Hathaway Inc.’s shares in the short term, it will
be important to consider the company's events, such as corporate factors at the same time
they are announced. The results of the financial statements are very important, as they affect
the short-term performance of the stock. The events of international economy can reward or
penalize the economies of various countries (as with Brexit or during the 2008 financial
crisis). And even institutions with a core business focused on the insurance industry, such as
Berkshire Hathaway Inc., could be subjected to increasingly stringent controls.
About the long-term performance of the Berkshire Hathaway Inc.’s shares, before investing
in Berkshire Hathaway Inc.’s shares, the last financial statements and statements of the
holding should therefore be observed, thanks also to the useful synthesis of analysts, who
usually take stock of the situation, underlining the possible changes in the structure of the
holding company, which affect the performance of the share. New acquisitions, mergers,
new services offered and new countries for expansion. Also, it is important to consider the
open and closed branches, to have an overview of the company's continuity.
The annual letter to the shareholders of Berkshire Hathaway Inc., written and signed every
year by Warren Buffett, is certainly a great way to learn all the information about this stock.
Around February, the letter, written by Buffett, is sent, and summarizes all the goals
achieved during the previous year. The Oracle of Omaha, stated in the letter of 2016 for
example, that 2015 ended with a 32% of net profit, thus closing a record-breaking 2015;
Buffett, was also very hopeful to be able to celebrate his 100th birthday with GEICO the
41 Berkshire Hathaway Inc., “Comparative Rights and Relative Prices of Class A and B Stock”
50
insurance company controlled by Berkshire Hathaway Inc., and said he was very confident
for the 2016 presidential elections and for the American economy in general. Buffett's letter
is therefore not an account of Berkshire's operations, but a true vision of the world, economy
and finance of one of the best and wisest investors in the world.
• To the Shareholders of Berkshire Hathaway Inc.:
“Berkshire’s gain in net worth during 2017 was $ 65.3 billion, which increased the per-
share Book Value of both Class A and Class B stock by 23 %. Over the last 53 years,
that is, since present management took over, per share Book Value has grown from $ 19
to $ 211,750, a rate of 19.1 % compounded annually.42
The format of that opening paragraph has been standard for 30 years. But 2017 was far
from standard: A large portion of our gain did not come from anything we accomplished
at Berkshire.
The $ 65 billion gain is nonetheless real – rest assured of that. But only $36 billion came
from Berkshire’s operations. The remaining $ 29 billion was delivered to us in December
when Congress rewrote the U.S. Tax Code.
After stating those fiscal facts, I would prefer to turn immediately to discussing
Berkshire’s operations. But, in still another interruption, I must first tell you about a new
accounting rule – a generally accepted accounting principle (GAAP) – that in future
quarterly and annual reports will severely distort Berkshire’s net income figures and very
often mislead commentators and investors.
The new rule says that the net change in unrealized investment gains and losses in stocks
we hold must be included in all net income figures we report to you. That requirement
will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire
owns $170 billions of marketable stocks (not including our shares of Kraft Heinz), and
the value of these holdings can easily swing by $10 billion or more within a quarterly
reporting period. Including gyrations of that magnitude in reported net income will
42 All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th
of those shown for the A shares.
51
swamp the truly important numbers that describe our operating performance. For
analytical purposes, Berkshire’s “bottom-line” will be useless.
The new rule compounds the communication problems we have long had in dealing with
the realized gains (or losses) that accounting rules compel us to include in our net income.
In past quarterly and annual press releases, we have regularly warned you not to pay
attention to these realized gains, because they – just like our unrealized gains – fluctuate
randomly.
That’s largely because we sell securities when that seems the intelligent thing to do, not
because we are trying to influence earnings in any way. As a result, we sometimes have
reported substantial realized gains for a period when our portfolio, overall, performed
poorly (or the converse).
With the new rule about unrealized gains exacerbating the distortion caused by the
existing rules applying to realized gains, we will take pains every quarter to explain the
adjustments you need to make sense of our numbers. But televised commentary on
earnings releases is often instantaneous with their receipt, and newspaper headlines
almost always focus on the year-over-year change in GAAP net income. Consequently,
media reports sometimes highlight figures that unnecessarily frighten or encourage many
readers or viewers.
We will attempt to alleviate this problem by continuing our practice of publishing
financial reports late on Friday, well after the markets close, or early on Saturday
morning. That will allow you maximum time for analysis and give investment
professionals the opportunity to deliver informed commentary before markets open on
Monday. Nevertheless, I expect considerable confusion among shareholders for whom
accounting is a foreign language.
At Berkshire, what counts most are increases in the normalized per-share earning power.
That metric is what Charlie Munger, my long-time partner, and I focus on – and we hope
that you do, too. Our scorecard for 2017 follows”. 43
43 Berkshire Hathaway Inc., 2017, “Letter to Shareholders of Berkshire Hathaway”
52
2.2.2. Berkshire Hathaway Inc.’s main investments in 2017
There are about 6 companies fully owned by Berkshire Hathaway, such as GEICO insurance
company, Dairy Queen chain, Bankamin Moore Paints, Netjets, Duracell, and Fruit of the
Loom. In addition to them, there is also a broad portfolio of shares owned by Berkshire
Hathaway Inc., which therefore also represents the performance of shares BRK.A and
BRK.B.
Below, Berkshire Hathaway Inc.’s portfolio.
Figure n.2.10
Berkshire Hathaway Inc.’s Portfolio
Source: Berkshire Hathaway Inc.’s Portfolio
Berkshire Hathaway Inc.’s portfolio is huge and diversified. As discussed, it invests in
consolidated businesses aiming to create value in a long-term horizon.
53
The 10 biggest investments made by Warren Buffett as of end of the fourth quarter of 2017
are the following:
1. Apple
At the top of Warren Buffett's list of major investments there is Apple. The value of the
position on the Cupertino firm is in fact around $ 27.98 billions.
2. Wells Fargo
Although the Berkshire Hathaway Inc. has cut his position on Well Fargo over the past
year, the total value of its investment has been around $ 27.8 billion.
3. Bank of America
Berkshire Hathaway Inc.’s position on Bank of America, unchanged during the fourth
quarter of 2017, represents a total value of $ 20.04 billions.
4. Coca-Cola
$ 18.5 billions is the value of Warren Buffett's investment most branded company in the
world.
5. American Express
The oracle of Omaha has chosen to maintain his position on the financial service
company American Express, corresponding to a market value of $ 15.06 billions.
6. Phillips 66
Buffett's position did not change, but the market value, in the fourth quarter of 2017, of
the investment on Phillips 66 rose to a total of $ 8.16 billions.
7. US Bancorp
In the last quarter of the 2017 the oracle of Omaha hasn’t changed his position on US
Bancorp. The total value of the position is in this case equal to $ 4.67 billions.
8. Moody's Corporation
With a market value of $ 3.64 billions, even Moody's has entered the ranking of the
largest investments emerging from the portfolio of Berkshire Hathaway Inc.
9. Bank of New York Mellon
In the last few months of the year Warren Buffett bought no less than 10.6 million shares
of the financial company, for a total of $ 3.28 billions.
10. Southwest Airlines
With a market value of $ 3.12 billion, the airline has earned the last place in the ranking
of Warren Buffett's major investments. The position on the company did not change in
54
the last quarter of the year and continued to settle on the 4.45 million shares bought at
the beginning of 2017.
Table n.2.3
15 common stock investments that in 2017 had the largest market value
Source: Berkshire Hathaway Inc.
Cost** corresponds at Berkshire Hathaway purchase price
From the table above, it is possible to note that Berkshire Hathaway Inc. has got very strong
positions in the main American corporations which present stable and consolidated business
and can, indeed, ensure to the holding upsides from the Value investment in the long run.
55
Chapter 3. Value investing in Italy
3.1. FTSE-MIB Index stocks that pass the Buffett test This analysis will be mostly based on the date 6th of October 2017. This is the day Berkshire
Hathaway Inc. acquired a portion of the Italian insurance company Cattolica Assicurazioni’s
share capital. The following study will reveal my personal reason justifying Warren Buffett’s
choice to prefer Cattolica Assicurazioni over other Italian Value companies.
On the 6th of October 2017, only 14 companies, out of 40, listed on the Borsa Italiana FTSE-
MIB Index44, could pass the Buffett test. Among them, especially financial companies such
as Assicurazioni Generali, Intesa Sanpaolo, Mediobanca, Unicredit, UnipolSai and Cattolica
Assicurazioni, but also industrials, as Telecom Italia, Fca, Enel and Poste Italiane, are part
of that privileged group. These undervalued companies, in fact, are monitored by Value
investors who are willing to extract as much Value as possible over a long-term horizon.
It is not just a matter of numbers and performances. The selection of companies to Value
invest in depends on the Buffett test strategy. To make it simpler, three main data must be
considered when putting in practice this strategy:
1. A Price / Equity (Book Value) ratio not exceeding 1.5;
2. A Price / Earnings ratio not exceeding 15;
3. The product of the previous two ratios not exceeding 22.5.
44 FTSE-MIB is the leading benchmark Index for Italian equity markets. This index, which captures about 80%
of the internal market capitalization, is made up of the various Italy’s Industry Classification Benchmark (ICB)
sectors’ primary importance and high liquidity companies. The FTSE-MIB Index measures the performance
of 40 Italian stocks and aims to reproduce the weightings of the enlarged sector of the Italian stock market. The
Index is derived from the universe of securities trading on the main stock market of Borsa Italiana (BIt). Each
security is analysed by size and liquidity and the Index provides a comprehensive representation by sector. The
FTSE MIB Index is weighted by market capitalization after adjusting the components for the free float.
56
For the sake of a better clarity, a Price / Equity (Book Value) ratio not exceeding 1.5 means
that the current Price must not exceed 1.5 times the Equity (Book Value). A Price / Earnings
ratio above 15 can be justified by a Price / Equity (Book Value) ratio lower than the
maximum recommended. It is necessary that the value of 22.5 is not exceeded when
proceeding the multiplication between the Price / Equity (Book Value) ratio and the Price /
Earnings ratio. Generally, it is possible to state that any combinations between the two values
is allowed if the product of those two values is not exceeding 22.5. In this case, no minimum
or maximum boundaries are mandatorily defined for the two ratios.45
Below, it is possible to have a look at the different values the FTSE-MIB companies that
pass the Buffett test presented on the 6th of October 2017.
Table n.3.1
FTSE-MIB companies under the Buffett Threshold on 6 October 2017
Source: Monica D’Ascenzo, 8/10/2017 Il Sole24Ore (Personal collection)
45 “Ecco i 13 titoli di Piazza Affari che superano il Buffett-test”, Il Sole24Ore, Monica D’Ascenzo, 8/10/2017
Date (06/10/2017) Price / Earnings Ratio Pirce / Equity Ratio (Price / Earnings X Price / Equity)Buffet test threashold < 15 < 1.5 < 22.5
Telecom Italia 10.88 0.80 8.70
Cattolica Assicurazioni 11.48 0.80 9.18
UnipolSai 10.46 0.89 9.30
Mediobanca 11.16 0.88 9.82
Ubi Banca 20.28 0.50 10.14
Fiat Chrysler Automobiles 7.00 1.46 10.22
Generali Assicurazioni 10.33 1.02 10.53
UniCredit 13.54 0.78 10.56
Poste Italiane 10.63 1.10 11.69
Intesa Sanpaolo 13.41 0.94 12.60
Exor 14.22 1.15 16.35
Banco Bpm 41.38 0.43 17.79
Enel 14.27 1.49 21.26
Saipem 29.43 0.76 22.36
FTSE-MIB companies under the Buffett Threshold on 06/10/2017
57
Usually Growth companies, opposite to Value companies, show an extremely high Price /
Equity (Book Value) ratio; this derives from the great expectations generated by Growth
companies and adds a notable speculative risk factor. In negative periods, Growth companies
shares loose much of the value they accumulated in the period of high popularity and
investments.
All the others FTSE-MIB companies were considered overvalued and not respecting the
Buffett threshold at that date. As said, the numbers are only a starting point, because the
investment choices are then made with a careful analysis of the company and management.
In fact, the strategy of Value investors, as Warren Buffett, in the case of minority stakes, is
to focus on companies that have good performances, recognizable businesses and a trustable
management. The Buffett’s holding usually does not ask for any seats in the board and does
not aim to change the top management of the company, and this seems to be in contrast with
the mentioned performing active approach. As discussed in Chapter 1., proxy voting and
active engagement allow companies to better their ESG behaviour, which is correlated to
equity performances and, consequently, reduce costs and increase competitiveness and
profitability. Therefore, active ownership, which can be exercised through corporate
governance, is a very effective practice to maximize shareholders’ value and improve long-
term returns. But along this project the investor’s passive approach will prevail.
Getting back to the analysis, the most important value to consider is the Product between the
Price / Equity (Book Value) and the Price / Earnings ratios. Even if Ubi Banca, Banco Bpm
and Saipem trigger the < 15 threshold relative to the Price / Earnings ratio, their final Product
is still under the required parameter of 22.5, so they can still pass the Buffett test.
Going into details, in the list there are three insurance companies, Cattolica Assicurazioni,
UnipolSai and Generali Assicurazioni. It is, in fact, relevant to highlight the presence of
insurance companies since Warren Buffett and his holding, the Berkshire Hathaway Inc., are
primarily focused on Value investing in insurance businesses. In fact, between the 5th and
the 6th of October 2017, Warren Buffett Value invested in Cattolica Assicurazioni.
From the table below, it is possible to see that Cattolica Assicurazioni has got the second-
best Product between Price / Earnings and Price / Equity (Book Value) ratios of the list. The
value is equal to 9.18 and fully respects the threshold of < 22.5 defined by Warren Buffett.
58
Furthermore, also the Price / Earnings and Price / Equity (Book Value) ratios are within the
acceptable values, so no threshold is minimally triggered. Consequently, it will be interesting
to understand the reason why the American Value investor preferred to invest in this
company over the others that appear in the below list.
Table n.3.2
FTSE-MIB companies under the Buffett Threshold on 6 October 2017
Focus on Cattolica Assicurazioni
Source: Monica D’Ascenzo, 8/10/2017 Il Sole24Ore (Personal collection)
By considering the other companies, it will be easy to notice that Telecom Italia has got a
better Product value than Cattolica Assicurazioni, equal to 8.70, and that UnipolSai, another
insurance company, has got a Product value, 9.30, very close to Cattolica Assicurazioni’s.
Keeping the focus on insurance businesses, Generali Assicurazioni presents a higher Product
value, 10.53, which seems to be less interesting to Value investors. So far, it could be
possible that the Product value presented by Cattolica Assicurazioni, which is the highest
Date (06/10/2017) Price / Earnings Ratio Pirce / Equity Ratio (Price / Earnings X Price / Equity)Buffet test threashold < 15 < 1.5 < 22.5
Telecom Italia 10.88 0.80 8.70
Cattolica Assicurazioni 11.48 0.80 9.18
UnipolSai 10.46 0.89 9.30
Mediobanca 11.16 0.88 9.82
Ubi Banca 20.28 0.50 10.14
Fiat Chrysler Automobiles 7.00 1.46 10.22
Generali Assicurazioni 10.33 1.02 10.53
UniCredit 13.54 0.78 10.56
Poste Italiane 10.63 1.10 11.69
Intesa Sanpaolo 13.41 0.94 12.60
Exor 14.22 1.15 16.35
Banco Bpm 41.38 0.43 17.79
Enel 14.27 1.49 21.26
Saipem 29.43 0.76 22.36
FTSE-MIB companies under the Buffett Threshold on 06/10/2017
59
among the insurance companies analysed in the table, pushed Warren Buffett and the
Berkshire Hathaway Inc. to choose the Verona based company within its industry.
For the sake of curiosity, considering the last three years, Cattolica Assicurazioni’ stock has
registered a higher annual growth than the FTSE-MIB Index., especially since Buffett’s
acquisition. From the below chart, in fact, it is possible to compare the movements of the
Cattolica Assicurazioni’s stock, in violet, and those of the FTSE-MIB Index, in black.
Furthermore, since the birthday of the new Italian government Conte, on the 23rd of May
2018, the FTSE-MIB Index has seen negative percentages, while Cattolica Assicurazioni’s
stock has clearly presented a positive percentage growth.
Figure n.3.1
FTSE-MIB Index compared to Cattolica Assicurazioni’ stock’s annual growth
Source: Borsa Italiana, June 2018
3.1.1. Cattolica Assicurazioni and its acquisition
With 1,600 employees and over 3.6 million customers, a direct network of over 1,500
agencies and a volume of € 5 billion, the Cattolica Group is one of the leading companies in
the Italian insurance sector and offers a wide range of insurance and financial solutions
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focused on the Life and Non-Life sectors. The company has been listed on the Milan Stock
Exchange since November 2000, has its headquarters in Verona and operates throughout the
country thanks to an extensive multi-channel distribution network, based on the agencies
and branches of the partner banks. Its offer is aimed primarily at the person, the family and
small and medium-sized production activities.
The Cattolica Group consists of seven insurance and bancassurance companies (ABC
Assicura, BCC Assicurazioni, BCC Vita, Berica Vita, Cattolica Life, Lombarda Vita, TUA
Assicurazioni), plus four companies active in the Real estate, agricultural and operational
services sectors (Cattolica Immobiliare, Cattolica Agricola, Cattolica Beni Immobili,
Cattolica Services).
The main banking partnerships of Cattolica Assicurazioni are currently with UBI Banca,
Iccrea46 and, more recently, with Banco BPM. The agreement between Cattolica and UBI
Banca provides for the distribution of insurance products of the Lombarda Vita joint venture
through the bank branches and the network of financial advisors of the UBI Group. The
union of these two great groups, for years rooted in the territory for values and traditions,
has created a wide commercial offer consisting of solutions for protection, savings and
investment for Retail and Private customers. Further important relationships of commercial
partnerships and collaborations are in place with other banks, including Banca Popolare di
Credito, Banca di Bologna, Banca Popolare Pugliese, Banca Galileo and Cassa di Risparmio
di San Miniato.47
Cattolica Assicurazioni has been one of the pioneers of bancassurance, a double-side
profitable arrangement between a bank and an insurance company allowing the insurance
company to sell its products to the bank's client base and vice versa. Over the years, it has
established important partnership agreements in the life and non-life business with various
banking institutions, reaching a nationwide position by number of points of sale. Today,
46 Iccrea Holding is at the top of the Iccrea Banking Group, the group of companies that offer products and
services for the operations of the Cooperative Credit Banks and Rural Banks. Iccrea is one of the protagonists
of the historic change that is taking place in the cooperative credit with the establishment of new national
banking centres. 47 Cattolica Assicurazioni, “company profile”
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Cattolica and the other bancassurance companies of the Group can rely on primary banking
partners and a network spread throughout the country.
At the end of 2017 Cattolica and Banco BPM signed an agreement for the establishment of
a strategic 15-year partnership in life and non-life bancassurance. The closing of the
transaction was finalized on March 29, 2018, following the approval of the competent
Supervisory Authorities and the obtainment, by Banco BPM, of the entire shares of Avipop
Assicurazioni and Popolare Vita. This agreement has probably had an important role in
pushing Buffett to recently invest in the company.
As already stated in the previous paragraph, on the 5th of October 2017 Berkshire Hathaway
Inc., the investment group headed up by Warren Buffett, by means of the mandatory updates
to CONSOB, made it official that it had acquired from Quaestio Capital Management SGR
an investment of 9.047% in Cattolica’s share capital, granting itself 15.7 million shares.48
According to the Consob communications on significant holdings on the 4th of May 2016,
Quaestio Capital Management stake of Cattolica Assicurazioni rose to 15.071%. Quaestio
Capital Management Sgr, manager of the Atlante Fund, acquired Popolare di Vicenza, which
already held a significant stake in Cattolica Assicurazioni.
Warren Buffett, so, invested € 115.8 millions in the Italian insurance group led by Alberto
Minali49. The bank Popolare di Vicenza50, through its liquidators, announced on the 5th of
October 2017 the sale of 15.7 million shares of the insurance group to the Berkshire
Hathaway Inc. This represented the last tranche of valorisation of the overall package that
the institute held in the insurance company. During spring 2017, in fact, the bank Popolare
48 Cattolica Assicurazioni, 2017, “Annual Report and Financial Statements” 49 Alberto Minali has been Chief Executive Officer and Director of Società Cattolica Assicurazioni (Società
Cooperativa) since June 1, 2017. Minali served as Chief Financial Officer at Assicurazioni Generali SpA
(Company) from October 2012 to January 2017. Prior to taking the position, he spent more than four years as
Portfolio Manager at Eskatos Capital Management Sarl, which he set up himself in 2008, focusing on
management of hedge funds active in the reinsurance 50 Banca Popolare di Vicenza, founded in Vicenza in 1866, is the first bank to be incorporated in Vicenza and
the first popular bank in Veneto. Today the bank is part of the Intesa Sanpaolo Group – popolarevicenza.it
62
di Vicenza sold a first 6 % through an accelerated book building51. On that occasion, 3.437
% of the package was passed to the Fondazione Cariverona52 and the remaining slice, equal
to 3.16 %, to the Fondazione Banca del Monte di Lombardia53.
In the acquisition of Cattolica Assicurazioni, which is a small-mid Cap company, the market
was not involved and the transaction has been made between the bank and the American
group. As for the price, the transaction was executed on the 6th of October at € 7.35 per share
through the Italian independent investment bank Intermonte SIM S.p.A. Ten cents more than
the price Cariverona paid and four cents more than the day before estimates made by the
insurance group that filed the session down by 0.14 % to € 7.31. The Verona, Italy-based
insurance company, on that day, rose as much as 23 %, the biggest advance on record, to €
9 per share. At the end of the day 6th of October 2017, in fact, the company’s market value
has passed from € 1.27 billions to € 1.46 billions, with a growth equal to 14.46 %.
The technical analysis built by Cattolica Assicurazioni’s financial analyst, Intermonte SIM
S.p.A. shows that this acquisition was a Value investment. In fact, the Italian independent
investment bank recommended the stock as “Outperforming”, in a one year horizon, due to
a market price equal to € 7.35 and an expected target price of € 8.2. The Margin of Safety
on the acquisition date was equal to 10.36 %, calculated as 1 - (7.35 / 8.20) *100. Comparing
the 6/10/2017 Margin of Safety with the 6/10/2017 US Generic Government 10 Year Yield,
the benchmark rate of return on low risk investments, it is possible to see that the
compensation for the risk involved in this transaction is equal to the difference 10.36 % -
2.36 %54 = 8 %. So, Value investing in Cattolica Assicurazioni at that time was meant to be
a low risk investment with an interesting upside over the long-run.
51 Book building is the process by which an underwriter attempts to determine at what price to offer an initial
public offering (IPO) based on demand from institutional investors. 52 The Fondazione Cassa di Risparmio di Verona Vicenza Belluno and Ancona is a private non-profit
organisation. It has banking origin, born following the “Amato Carli” law reform of 1990, which had as main
objective the privatization of the Italian credit system 53 Fondazione Banca del Monte di Lombardia is a foundation of banking origin, created in July 1992 after the
“Amato Carli” law reform of 1990, following the spin-off of the banking activity conferred to the Banca del
Monte di Lombardia S.p.A. 54 Bloomberg, 6 October 2017, “US Generic Government 10 Year Yield”
63
The table below, built with data published by Borsa Italiana, shows the Ratings on Cattolica
Assicurazioni made by Intermonte SIM over the 3 years’ period 2015 – 2018.
Table n.3.3
Cattolica Assicurazioni Ratings 2015 – 2018 by Intermonte SIM S.p.A.
Borsa Italiana, Intermonte SIM, “Cattolica Assicurazioni studies and reports”
(Personal collection)
Cattolica Assicurazioni, therefore, has been given an outperforming rating between March
and November 2017, whit prices and target prices that have been increasing until May 2018.
outperformance and undervaluation are two faces of the same coin: usually undervalued
stocks are expected to outperform the market and this is, as discussed, the case for Cattolica.
In the view of Intermonte SIM, the rating “Outperform” means that the stock will outperform
the market by between + 10 % and +25 % over a 12-month period. The rating “Neutral”,
quote often associated with Cattolica’s stock, means that the stock will perform between -10
% and +10 % with respect to the market over a 12-month period.
Date Rating Price Target Price20/03/2015 Outperform 7.54 8.4014/05/2015 Neutral 7.62 8.210/08/2015 Neutral 7.21 813/11/2015 Neutral 7.22 811/03/2016 Neutral 6.1 717/05/2016 Neutral 5.7 708/08/2016 Neutral 5.59 723/11/2016 Neutral 5.33 720/03/2017 Outperform 6.23 7.503/05/2017 Neutral 8.7 8.11/05/2017 Outperform 8.1 8.225/07/2017 Outperform 7.24 8.204/08/2017 Outperform 7.29 8.207/11/2017 Outperform 7.29 8.216/11/2017 Outperform 9.02 10,530/01/2018 Neutral 10.65 1122/03/2018 Neutral 9.16 10.509/05/2018 Neutral 8.68 10.514/05/2018 Neutral 8.49 10
64
Focusing on the Berkshire Hathaway's move, it should be noted that Buffett has long sought
to invest in the Italian insurance assets. In 2011, the American billionaire had considered
entering the capital of Fondiaria Sai55 when the company sought ways for the revival.
Subsequently, in 2013 he presented an offer to take over the assets of Milano Assicurazioni56
that were put up for sale by UnipolSai57 after having acquired the group headed by the family
Ligresti.
Warren Buffett does not seem to be afraid of making important acquisitions in Italy. During
December 2016, he bought the Italian tractors manufacturer Zephir58. But he is mainly
focusing on the insurance sector, where he is already partially operational thanks to the fact
that he is one of the main operators in the reinsurance world through General Re, Bh
Reinsurance, GEICO and Other Primary. Having said that, given the investment capacity of
Berkshire Hathaway Inc., the bet on Cattolica Assicurazioni is evidently a drop in the sea of
money that the conglomerate has at its disposal. Furthermore, according to Bloomberg
multiples, the company deals with discounting on assets. Moreover, the investment
perspective of Berkshire Hathaway Inc. is normally long-term, which suggests that it will
certainly be a stable participation.
Minali was very excited about Buffett’s investment in Cattolica Assicurazioni and has
interpreted the entrance of Buffett as “a great act of trust towards the company and its
management and an extraordinary chance for Cattolica Assicurazioni, given the
opportunities that this prestigious presence in its capital can open”. The investment, strategic
and not only financial, in the Italian company has not arrived by chance, but rather is the
result of a careful screening that goes well beyond the multiples of the company.
55 Fondiaria-Sai S.p.A. (Fonsai) was an Italian insurance company based in Turin, which was part of the Unipol
Insurance Group. On 6 January 2014, following the merger with the other insurance companies of the Unipol
Group, it became UnipolSai. 56 Milano Assicurazioni S.p.A. was an Italian insurance company based in Milan, which was part of the
Fondiaria Sai insurance group and from 2012 to 2014 indirectly part of the Unipol insurance group. 57 UnipolSai Assicurazioni S.p.A. is the multi-branch insurance company of Unipol Gruppo S.p.A., leader in
Italy in the Non-life business and in the motor liability insurance (R.C. Auto) 58 Zephir has for 40 years been the European leader in the production of road-rail LOCOTRACTORS and
industrial tractors, thanks to the widest range of vehicles guaranteeing the best performances in the world.
65
Regarding possible aims in terms of presence in the council or management, it is usually not
in the conglomerate policy to affect the governance of the investee companies, especially if
the share is not 100 % controlled. Among other things, even if the American group had
different intentions they would clash with the peculiarities that make the insurance group an
investment different from the others: it is a cooperative company that by statute still provides
the capita vote. In short, the shares, even if numerous, in the assembly still count one single
vote, and access to the assembly and the list of members is not immediate. Elements that
make it difficult for a future enhancement of participation, unless the rules change. Change,
that has for long been thought, and that has had a turnaround.
In fact, on the 28th of April 2018, the Board of Directors of Cattolica Assicurazioni approved
at 99.9 % the new statute with the adoption of a monistic governance system and a reduction
in the number of board members to 17. The cooperative spirit, and so the capita vote, was
confirmed, but the change aims to enhance the presence of institutional investors by
providing for a 5 % increase in the shareholding capitalization for companies and confirming
the shareholding threshold for natural persons at 0.5 %. The goal is to attract other investors,
encouraging their arrival, as happened, with the landing of Warren Buffett. “The cooperative
structure has never been discussed but we want to adapt the governance to the best
international standards”, explained CEO Alberto Minali. “We will introduce the possibility
for institutional investors, beyond a certain threshold, to have a representation on board”, he
added. The CEO of Cattolica, however, clarified that: “The exceeding of the limit does not
prevent to hold further shares, without losing the status of a member. Non-equity rights
remain exercisable within the limit of the indicated thresholds”.
As of June 2018, Berkshire Hathaway Inc. has not given any signal either to present a list or
request to have a slot in the board, as opposed to the Fondazione Cariverona, which has been
recently authorized by IVASS59, but, if any signals arrive, Cattolica Assicurazioni will
obviously consider that because Warren Buffett is the most influential shareholder. So,
becoming a member of the board of the insurance company does not seem to be a priority
59 IVASS, Istituto per la Vigilanza sulle Assicurazioni, is a body with legal personality under public law that
works to ensure the adequate protection of the insured by pursuing the sound and prudent management of
insurance and reinsurance companies and their transparency and fairness towards the customers. The Institute
also pursues the stability of the system and financial markets.
66
for Berkshire Hathaway Inc., and this clash with the active ownership concept discussed
above, but corporate governance will play a fundamental role in the last steps of this analysis.
3.1.2. Cattolica’s share price and market capitalization
During the year 2017, 1,328,625 shares were purchased and 343,905 sold, for a total price
of € 9.4 million for purchases and € 2.4 million for sales. As of 31st of December 2017, the
company held 6,679,907 own shares, equal to 3.8 % of the share capital, recorded in the
Negative reserve for own shares in the balance sheet portfolio for a total book value of € 47
million. Out of the 23,763 shareholders recorded in the company’s Register at the end of
2017, Berkshire Hathaway Inc. has got the largest stake, 9.047 %, which grants Warren
Buffett a strong influence.60
Figure n.3.2
Cattolica Assicurazioni’s ordinary share price, 8 June 2018
Source: Cattolica Assicurazioni, “The Cattolica stock”
The company share price registered at the date 08/06/2018 is € 7.37. From the above chart,
it is clearly visible that in the last month the price per share has been losing value, -17.23 %,
passing from € 8.64 per share, at the beginning of May 2018, to the already mentioned €
7.37 per share. This fall could be attributed to the uncertain political situation that the Italian
60 Cattolica Assicurazioni, 2017, “Annual Report and Financial Statements 2017”
67
economy has been subject to and possibly the per share price will recover soon. In the last 3
years, the share price has changed in a relevant way.
Figure n.3.3
Cattolica Assicurazioni ordinary share price movements in the last 3 years
Source: Cattolica Assicurazioni, January 2015 – June 2018, “Price and Performance”
68
From the figure above, it is possible to notice that in a period of just 3 years the spread
between the Maximum and Minimum prices is considerable: the difference, in fact, between
the Maximum price € 10.96 and the Minimum price € 4.95 is equal to € 6.1 per share. The
graph clearly shows the high volatility the share price of Cattolica Assicurazioni has been
subject to in the last three years due to the bank crisis and the political uncertainty and
instability. Deepening the price analysis, it will be very valuable to see how the Max and
Min prices have been varying since the beginning of 2015 up to the 8th of June 2018.
Table n.3.4
Cattolica Assicurazioni’s historical prices January 2015 – June 2018
Source: Cattolica Assicurazioni’s historical prices January 2015 – June 2018
(Personal collection)
Max/Min Share price Open High Low Close
Max 2015 7.50 7.55 7.43 7.50Min 2015 6.04 6.16 6.00 6.02Max-Min 2015 1.46 1.39 1.43 1.48
Max 2016 7.28 7.29 7.15 7.29Min 2016 5.02 5.05 4.95 4.98Max-Min 2016 2.26 2.24 2.19 2.31
Max 2017 9.58 9.60 9.37 9.53Min 2017 5.80 5.87 5.73 5.79Max-Min 2017 3.78 3.73 3.65 3.75
Max Pre-06/10/2017 8.24 8.34 8.13 8.24Min Pre-06/10/2017 5.55 5.71 5.55 5.69Max-Min Pre 06/10/2017 2.70 2.64 2.58 2.55
Max Post-06/10/2017 9.58 9.60 9.37 9.53Min Post-06/10/2017 8.60 8.70 8.14 8.58Max-Min Post 06/10/2017 0.98 0.90 1.24 0.96
Max 2018 10.85 10.96 10.50 10.73Min 2018 7.23 7.35 7.03 7.16Max-Min 2018 3.62 3.61 3.47 3.57
69
In this analysis, 767 different prices were considered, and each of them was given an Open,
High, Low and Close value. It is possible to affirm that in the years 2015 and 2016 the price
per share of Cattolica Assicurazioni has remained quite stable, with no valuable variations.
2017 is a very important year for the company since Warren Buffett with his holding
Berkshire Hathaway Inc., acquired the 9.047 % of the company’s shares. It is easy to notice
that the Max values have increased consistently, especially after the 6th of October, when the
acquisition was accomplished. From the 6th of October to the 31st of December 2017, the
share price has had a growth of 38 %. Here the reason why the table splits the year 2017 into
a Pre-acquisition and Post-acquisition analysis, important to get this divergence in price.
Notably, the periods with the highest volatility have been 2017, especially the Pre-
acquisition 2017, and 2018, until now. These periods show the highest Maximum-Minimum
share price values.
Table n.3.5
Cattolica Assicurazioni’s historical prices January 2015 – June 2018
Source: Cattolica Assicurazioni’s historical prices January 2015 – June 2018
(Personal collection)
Average Share Price Open High Low Close
Average 2015 6.93 7.01 6.84 6.92
Average 2016 5.77 5.85 5.68 5.76
Average 2017 7.51 7.60 7.42 7.52
Average Pre 06/10/2017 7.03 7.11 6.94 7.04
Average Post 06/10/2017 9.11 9.23 8.98 9.10
Average 2018 9.08 9.19 8.93 9.05
70
On average, the highest share price values pertain again to the Post-acquisition 2017. Since
2015 and before the acquisition, the share price of the insurance company has never been so
high. Warren Buffett has had a very positive effect on the company’s performances until
now.
The total number of ordinary shares of Cattolica Assicurazioni is equal to 174,293,926. Each
share has a nominal value of € 3, so the share capital totals € 522,881,778.61 Considering the
close price on the 8th of June 2018, the market capitalization at that date is €
1,284,546,234.62, which can be rounded to € 1.2845 billions. At time of acquisition, when
the price per share was equal to € 7.35, the market capitalization was equal to € 1.2810
billions. On the 8th of June 2018, the difference between the acquisition time and current
market capitalization correspond to € 0.0035 billions, so € 3.5 millions, which, multiplied
for Buffett’s stake of 9.047 %, registers an upside, even if small, in Berkshire Hathaway
Inc.’s investment equal to € 0.316 millions.
Figure n.3.3
Cattolica Assicurazioni’s Market capitalisation October 2017 – June 2018
Source: Personal Collection
The chart shows that the market capitalization of the company has been characterized by ups
and downs since the date of acquisition by Berkshire Hathaway Inc. It is interesting to
understand why the share price and so the market capitalization has changed over time.
61 Share capital, Cattolica Assicurazioni, company’s official investor relations web page.
71
The Minimum market capitalization value, € 1267.29 millions, has been registered on the
5th of October 2017, the day before the acquisition of the company: the day after in fact, the
share price benefitted from the American holding’s investment showing a record rise of
14.46 % and closing at € 8.57. The Maximum market capitalization value, €1861.66
millions, happened on the 25th of January 2018, when President of European Central Bank
(ECB) Mario Draghi announced the possibility of an increase in interest rates. Getting closer
to the present, the fall in value started on the 23rd of May 2017, when the President of the
Italian Republic, Sergio Mattarella, appointed Giuseppe Conte to form the new government
after frustrating political elections.
At the time of Maximum market capitalization, the value created from the investment was
equal to € 53.77 millions. A notable amount for Berkshire Hathaway Inc. considering that
the total investment was € 115.8 millions. That value created, in fact, corresponds to 46.43
% of the amount invested, which in case of sale would have represented a very good Return
on Investment. Clearly, the investment has long term horizon, but this example is useful to
understand that in less than four months Buffett could have highly profited from the
acquisition. Making predictions on the future share price is very difficult and the only
certainty remains the uncertainty and volatility of financial markets.
Figure n.3.4
Cattolica Assicurazioni’s Market capitalisation October 2017 – June 2018
Source: Personal Collection
72
Keeping the focus on the market capitalization, it is reasonable to study the % change it has
been subject to from the acquisition date. The date of the Maximum % change in the market
capitalization, 49.79 %, corresponds to the date of the Maximum market capitalization, the
25th of January 2018. The initial and final values present a % change equal to 1.03, but during
the period the Max % change has been equal to 47.19, Min % change equal to - 1.78 and
Average % change equal to 24.39.
3.2. Corporate governance as a key driver in Buffett’s model
In Warren Buffett’s model of corporate governance, managers feel like owners of
shareholder capital. They put shareholders’ interests at the top, but even first-rate managers
will sometimes have conflicts of interests with shareholders. Buffett has long thought how
to solve those conflicts and has expressed that in his book, “The Essays of Warren Buffett:
Lessons for Corporate America”.
The book addresses some of the most common governance problems. First, it is important
that managers properly and easily communicate with shareholders. All investors should
receive the same information at the same time. Buffett and Berkshire Hathaway Inc. avoid
making predictions, that too often lead other managers to erroneously make up their financial
reports. Secondly, it is necessary not to map hierarchies or chain of command but to have
first-rate managers who are able, honest, and hard-working. The Chief Executive Officer
(CEO) selection needs special attention because of three major differences Buffett identifies
between CEOs and other employees.
1. Standards for measuring a CEO’s performance are inadequate or easy to manipulate, so
a CEO’s performance is harder to measure than that of most employees;
2. No one is senior to the CEO, so no senior person’s performance can be measured either;
3. A board of directors cannot serve that senior role since relations between CEOs and
boards are conventionally congenial.62
62 Buffett, Warren, 1997 (fourth edition), “The Essays of Warren Buffett: Lessons for Corporate America”
73
Major reforms have attempted to align management and shareholder interests or enhance
board oversight of CEO performance. Separation between the identities and functions of the
Chairman of the Board and the CEO, nomination and compensation committees were also
heralded as promising reforms. Perhaps the most pervasive prescription is to populate boards
with independent directors. None of these innovations has solved governance problems,
however, and some have exacerbated them.
The best solution Buffett proposes is to pay great attention in identifying CEOs who will
perform capably regardless of weak structural restraints. Large institutional shareholders
must exercise their power to oust CEOs that do not measure up to the demands of corporate
stewardship. Outstanding CEOs do not need a lot of coaching from owners, although they
can benefit from having a similarly outstanding board. Directors therefore must be chosen
for their business savvy, their interest, and their owner-orientation. According to Buffett,
one of the greatest problems among boards in corporate America is that members are selected
for other reasons, such as adding diversity or prominence to a board or independence.
Buffett pays much attention to the separation between managers and controlling
shareholders. When controlling shareholders correspond to managers, the director power is
weakest: in fact, there is a little the director can achieve when disputes arise between
themselves and the managers / controlling shareholders. In the opposite situation, when
controlling shareholders are not involved in management, directors power is strongest and
can directly solve the disagreement with the controlling shareholders.
Commonly, the biggest troubles for managers happen when controlling shareholders are
missing. To increase its effectiveness, the board should have small dimension and include
outside directors mostly. The biggest threat to shareholders is the possibility for the director
to resign. Holding regular meetings without the CEO of the company can help enhance the
effectiveness of corporate governance and, consequently, of business performance.
At Berkshire Hathaway Inc. CEOs must respect the following rules:
1. Run their business as if they are its sole owner;
2. Keep the business as the only asset they hold;
3. Never sell or merge the business for a hundred years.
74
This enables Berkshire CEOs to operate with a long-term horizon ahead of them, in
comparison to most colleagues at public companies, where the focus is strictly short-term.
Short-term results matter, of course, but the Berkshire Hathaway Inc.’s approach is to focus
on the long-term to earn sustainable competitive advantages.
Many managers are paid stock options whose value increases simply by retention of
earnings. This can happen when management and shareholder interests seem to be aligned,
but instead can create more divisions. By retention of earnings, in fact, managers can claim
annual earnings increases without any individual performance and contribute towards the
return on capital. Stock options often transfer shareholder’s wealth to managers. Buffett
claims for caution to be used when approving stock options plans, because of the lack of
alignments they can create. Buffett retains that executives should be measured by
performance, that should be measured by profitability. Stock options, if used, should be
related to individual performances, rather than corporate performances, and prices based on
business value. At Berkshire Hathaway Inc., at least, stock options should not be paid to
executives. All exceptional managers who earn cash bonuses based on the performance of
their own business, in fact, can simply buy whatever stock they want.63
3.2.1. The value of corporate governance at Cattolica
An important reason that attracted Warren Buffett to Value invest in Cattolica Assicurazioni
is the company’s share acquired, which then translates into the potential ability to influence
the corporate governance. Considering that Warren Buffett invested € 115.8 millions to
acquire 15.7 million shares of Cattolica Assicurazioni – that granted him the 9.047 % share
of the company – it is possible to calculate what share he would have obtained in UnipolSai
and Generali Assicurazioni by investing that same amount of capital, on the same date.
Detailed information about the three companies’ share capital, directly extracted from
official data, will follow here. Knowing what the exact number of ordinary shares is and who
the main shareholders are is in fact very useful to accomplish this comparative analysis. The
result will show that investing in Cattolica would have provided a major influence.
63 June Rhee; HLS Forum on Corporate Governance and Financial Regulation (Co-editor), March 29, 2013,
“Governance Buffett Style”, “Harvard Law School Forum on Corporate Governance and Financial Regulation”
75
1. Cattolica Assicurazioni:
Figure n.3.5
Cattolica Assicurazioni’s shareholder’s structure
Source: Cattolica Assicurazioni, 2018, “members and shareholders”
The total number of ordinary shares of Cattolica Assicurazioni is equal to 174,293,926.
Each share has a nominal value of € 3, so the share capital totals € 522,881,778, as of
2018. The chart below shows that Berkshire Hathaway Inc, as already mentioned more
than once, holds the largest stake of the share capital. Its stake is equal to 9.047 %, which
rounded appears, as in the picture, equal to 9.05 %. With smaller percentages of shares
follow Fondazione Cariverona (3.44 %), Fondazione Banca del Monte di Lombardia
(3.16 %), Norges Bank (3.09 %), Own shares (3.83 %). Other members and shareholders
account for the 77.43 %: the difference between a member and a shareholder is that the
former grants personal rights such as the right to attend General Meetings, while the
latter holds capital-related rights, such as collecting dividends and participating to capital
76
increases. Before, each member could hold a maximum stake of 0.5 % of the capital if a
natural person, or 2.5 % if a corporation: as mentioned above, after 28th of April 2018,
the Board of Directors of the insurance company approved the maximum stake of 5 %
for corporations, hoping to have an increase in the number of institutional investors.64
2. UnipolSai:
UnipolSai share capital is composed by UnipolSai Ordinary shares, as showed below.
Table n.3.6
UnipolSai’s share capital
Source: UnipolSai, 2018, Share Capital
Total number of ordinary shares for UnipolSai is 2,829,717,372. Each share has a
nominal value equal to € 0.71. As of the 6th of June 2018, the main shareholders are:
Unipol Gruppo S.p.A. (57.346 %), Unipol Investment S.p.A. (9.999 %) and Unipol
Finance S.r.l. (9.992 %).
Table n.3.7
UnipolSai’s Main shareholders
Source: UnipolSai, 2018, Shareholding structure
64 Share capital, Cattolica Assicurazioni, company’s official investor relations web page.
77
3. Generali Assicurazioni:
Updated to the 16th of April 2018, the shareholder structure of Generali Assicurazioni is
as follows. Main shareholders, who accounts for the 23.14 % of total share capital, are:
Mediobanca (12.95 %), Caltagirone Group (4.00 %), Delfin S.AR.L. – Leonardo del
Vecchio Group (3.15 %) and Edizione Srl – Benetton Group (3.04 %). Moreover,
remaining share capital is hold by Institutional investor (41.16 %), Retail shareholders
(26.33 %), other investors (9.21 %) and not identifiable shareholders (0.16 %).
Figure n.3.6
Generali Assicurazioni, 16 May 2018, Ownership structure
Source: Generali Assicurazioni, 16 May 2018, Ownership structure
As of 2018, Generali Assicurazioni’s share capital is equal to € 1,565,165,364. The total
number of shares is 1,565,165,364, so each share has a nominal value of € 1.
Having examined the shareholding structures and the share capitals of the considered
insurance companies, it is now interesting to analyse the different companies’ shares, both
Ownership structure, Generali Assicurazioni, 16/045/2018
Source: Ownership structure, Generali Assicurazioni
78
in the past, at the time of Cattolica Assicurazioni’s acquisition by Buffett, and in the present,
that Buffett would have obtained by investing the same amount of capital € 115.8 millions.
Table n.3.8
Past analysis of the companies’ stakes acquired by Buffett, 6 October 2017
Source: Personal collection
On the 6th of October 2017, time of acquisition of Cattolica Assicurazioni’s 9.047 % shares,
Warren Buffett would have obtained the 2.087 % shares of UnipolSai and the 0.473 % shares
of Generali Assicurazioni. The % shares have been calculated as follows:
• Cattolica Assicurazioni
Knowing that Market Capitalization (€ 1.281 Bil) is equal to the product between the
Share price (€ 7.35) and the number of Shares outstanding (0.174 Bil), Cattolica
Assicurazioni Buffett’ share equal to 9.047 % derives from (€ 0.1158 Bil / € 1.281 Bil)
* 100. For sake of calculation simplicity and uniformity, the invested amount of € 115.8
millions has been converted into € 0.1158 billions.
• UnipolSai
Knowing that Market Capitalization (€ 5.546 Bil) is equal to the product between the
Share price (€ 1.96) and the number of Shares outstanding (2.829 Bil), UnipolSai
Buffett’ share equal to 2.087 % derives from (€ 0.1158 Bil / € 5.546 Bil) * 100. For sake
of calculation simplicity and uniformity, the invested amount of € 115.8 millions has
been converted into € 0.1158 billions.
• Generali Assicurazioni
Knowing that Market Capitalization (€ 24.432 Bil) is equal to the product between the
Share price (€ 15.61) and the number of Shares outstanding (1.565 Bil), Generali
Assicurazioni Buffett’ share equal to 0.473 % derives from (€ 0.1158 Bil / € 24.432 Bil)
Date (06/10/2017) Share price (€) Shares outstanding (Bil) Market Capitalization (Bil €) Buffet's share (%)
Cattolica Assicurazioni 7.35 0.17 1.28 9.04
UnipolSai 1.96 2.82 5.54 2.08
Generali Assicurazioni 15.61 1.56 24.43 0.47
79
* 100. For sake of calculation simplicity and uniformity, the invested amount of € 115.8
millions has been converted into € 0.1158 billions.
Table n.3.9
Present analysis of the companies’ stakes acquired by Buffett, 7 June 2018
Source: Personal Collection
On the 7th of June 2018, time of current analysis, Warren Buffett would have obtained the
8.650 % shares of Cattolica Assicurazioni, the 2.176 % shares of UnipolSai and the 0.513 %
shares of Generali Assicurazioni. The % shares have been calculated as follows:
• Cattolica Assicurazioni
Knowing that Market Capitalization (€ 1.338 Bil) is equal to the product between the
Share price (€ 7.68) and the number of Shares outstanding (0.174 Bil), Cattolica
Assicurazioni Buffett’ share equal to 8.650 % derives from (€ 0.1158 Bil / € 1.338 Bil)
* 100. For sake of calculation simplicity and uniformity, the invested amount of € 115.8
millions has been converted into € 0.1158 billions.
• UnipolSai
Knowing that Market Capitalization (€ 5.319 Bil) is equal to the product between the
Share price (€ 1.88) and the number of Shares outstanding (2.829 Bil), UnipolSai
Buffett’ share equal to 2.176 % derives from (€ 0.1158 Bil / € 5.319 Bil) * 100. For sake
of calculation simplicity and uniformity, the invested amount of € 115.8 millions has
been converted into € 0.1158 billions.
• Generali Assicurazioni
Knowing that Market Capitalization (€ 22.538 Bil) is equal to the product between the
Share price (€ 14.40) and the number of Shares outstanding (1.565 Bil), Generali
Date (07/06/2018) Share price (€) Shares outstanding (Bil) Market Capitalization (Bil €) Buffet's share (%)
Cattolica Assicurazioni 7.68 0.17 1.33 8.65
UnipolSai 1.88 2.82 5.31 2.17
Generali Assicurazioni 14.40 1.56 22.53 0.51
80
Assicurazioni Buffett’ share equal to 0.513 % derives from (€ 0.1158 Bil / € 22.546 Bil)
* 100. For sake of calculation simplicity and uniformity, the invested amount of € 115.8
millions has been converted into € 0.1158 billions.
After these considerations, it seems more obvious to understand why Buffett preferred
investing in Cattolica Assicurazioni over UnipolSai and Generali Assicurazioni. Apart from
the lower influence on the corporate governance, it must be added that investing in such
nationalistic companies, as UnipoSai and especially Generali Assicurazioni, would have
shaken up the system, and this is further explanation that justifies the acquisition of Cattolica.
3.2.2. The unification of Ownership and Control at Cattolica
Having expressed important reasons why Warren Buffett and his holding Berkshire
Hathaway Inc. invested in Cattolica Assicurazioni, it will be now interesting to link Buffett’s
model of Governance with Cattolica’s one.
As already mentioned along the analysis, on the 28th of April 2018, the Board of Directors
of Cattolica Assicurazioni approved at 99.9 % the new statute with the adoption of a monistic
governance system and a reduction in the number of board members to 17. The cooperative
spirit, and so the capita vote, was confirmed, but the change aims to enhance the presence of
institutional investors by providing for a 5 % increase in the shareholding capitalization for
companies and confirming the shareholding threshold for natural persons at 0.5 %. The goal,
again, is to attract other investors, encouraging their arrival, as happened, with the landing
of Warren Buffett.
So, the question is why Cattolica Assicurazioni decided to adopt a monistic system. The
monistic system is characterized by the fact that the control body is not separated from the
management body, but is constituted within it. The one-tier model, in fact, provides for the
impossibility of entrusting the administration to a single director and the elimination of the
supervisory board. Therefore, there is:
1. A mandatory board of directors, in place of a possible sole director, who is exclusively
responsible for the management of the company;
2. A management control committee chosen within the board of directors.
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The monistic system differs from the traditional one characterised by the board of directors
and the board of statutory auditors and from the dualistic one which envisages supervisory
board and the management committee.
In Italy, two thirds of the listed companies have got controlling shareholders in a minority
in the assembly. Simplification is the underlying motivation for the new corporate
governance trend that goes towards the monistic system. It is not a coincidence that the
companies that have adopted it belong to highly supervised sectors. Cattolica Assicurazioni
and Ubi Banca adopted a monistic system while Banca Leonardo is on the point to do that.
Despite being introduced with the 2003 Vietti reform, the already explained monistic system
has not affirmed in Italy: just the 2.5 % of the companies chose it, against the 20 – 30 % rate
in countries such as Holland, Japan and Portugal, which have admitted this option more
recently. In France, for example, more than 80 % of listed companies have got a monistic
system, but there that model is the traditional model, which all countries are struggling to
abandon.
The problem of the traditional Italian system is that it is unique: the board of statutory
auditors and the “Voto di lista” exist only in Italy. It does not mean that it is not working,
but that, in a world which is much more facing the globalization of markets and best practice,
the local context must make even greater efforts to adapt to international standards. The
monistic, conversely, is a more understandable model for foreign investors who have
exponentially invested in the FTSE-MIB Index stocks. Since 2008 the FTSE-MIB listed
companies’ float has increased from less than 50 % to over 60 %. The average share of
capital hold in the assembly has meanwhile risen from just over 25 % to over 45 % and the
weight of controlling shareholders has almost halved from 70 % to 40 %.
Therefore, as previously announced, two thirds of the listed companies have got the
controlling shareholders in a minority in the assembly. This shows the weakening of the
traditional distinctions between majority shareholders and minority shareholders, with the
paradox of the appointment of minority board and the risk of a split between corporate bodies
and within the board itself. The monistic should precisely help to increase social cohesion,
rationalize the system of controls and overcome the embarrassment of companies that have
chosen to present the list of the outgoing board, but that avoid doing so because of the
statutory board which should control it. In addition, there is also a reason of general savings:
82
the 675 statutory auditors of the Italian listed companies cost a total of € 33 millions, and the
monistic system could be the tool to reduce those costs.65
If, from one side, the reason of the governance choice made by the Verona based company
is welcoming new and foreign institutional investors, from the other side, it is in net contrast
with what Eugene F. Fama and Michael C. Jensen express in their famous article “Separation
of Ownership and Control”. They think that decision managers are more likely to take
actions that deviate from shareholders’ interest when effective control procedures are
missing. In fact, they state that: “An effective system for decision control implies, almost by
definition, that the control (ratification and monitoring) of decisions is to some extent
separate from the management (initiation and implementation) of decisions. Individual
decision agents can be involved in the management of some decisions and the control of
others, but separation means that an individual agent does not exercise exclusive
management and control rights over the same decisions.”
The authors of the article aim to explain why the separation of decision management,
decision control and residual risk bearing is efficient. It is important to keep in mind the
“relations between the risk-bearing and decision processes of organizations:
1. Separation of residual risk bearing from decision management leads to decision systems
that separate decision management from decision control.
2. Combination of decision management and decision control in a few agents leads to
residual claims that are largely restricted to these agents”.
Therefore, the conversion of the under-analysis insurance company into a monistic system,
which combines those nominated functions, seems to represent an inefficient choice.
Furthermore, Fama and Jenses refer to noncomplex as companies where specific information
relevant to decisions is concentrated in one or a few agents: usually most small organizations
tend to be noncomplex, and most large organizations tend to be complex, but the
correspondence is not perfect. Consequently, small noncomplex organizations can
efficiently control the agency problems caused by the combination of decision management
and control in one or a few agents by restricting residual claims to these agents. Such a
combining of decision and risk-bearing functions is efficient in small noncomplex
65 Il Sole24Ore, 15 June 2018, “Perchè il monistico piace agli investitori”
83
organizations because the benefits of unrestricted risk sharing and specialization of decision
functions are less than the costs that would be incurred to control the resulting agency
problems. Since Cattolica Assicurazioni is listed, it is considered a complex company.66
In fact, being Cattolica Assicurazioni a mutual insurance company, it is interesting to refer
to the following article’s section as well: “Nearly complete separation and specialization of
decision control and residual risk bearing is common in large open corporations and financial
mutuals where most of the diffuse residual claimants are not qualified for roles in the
decision process and thus delegate their decision control rights to other agents. When
residual claimants have no role in decision control, we expect to observe separation of the
management and control of important decisions at all levels of the organization.”
Having said that, the governance conversion put in action seems even more controversial. In
fact, Cattolica Assicurazioni used to have a separation between control and management,
but after Buffett’s arrival that separation changed into a unification of the functions. The
reason could be that Warren Buffet, as institutional investor, doesn’t look for an active
approach in the governance of Cattolica Assicurazioni and doesn’t need to have a
supervisory board that defends his interests. He fully trusts the management, and it was
probably to avoid the conflicts of interests mentioned in the previous pages that he pushed
for that unification of management and control. Simplifying the management, Buffett
maintains a passive role towards his shares and give full support and trust to the individual
board of directors, represented by Alberto Minali. No conflicts of interests should happen
but, apparently, less efficiency will lead to poorer economic returns.
As a matter of fact, this extract is referred to the economic benefits for a complex
organisation with separation of management and control: “Separation and diffusion of
decision management and decision control – in effect, the absence of a classical
entrepreneurial decision maker – limit the power of individual decision agents to expropriate
the interests of residual claimants. The checks and balances of such decision systems have
costs, but they also have important benefits. Diffusion and separation of decision
management and control have benefits because they allow valuable knowledge to be used at
66 Fama, Eugene F.; Jensen, Micheal C., 1983, “Separation of Ownership and Control”, University of Chicago
University of Rochester
84
the points in the decision process where it is most relevant and they help control the agency
problems of diffuse residual claims. In complex organizations, the benefits of diffuse
residual claims and the benefits of separation of decision functions from residual risk bearing
are generally greater than the agency costs they generate, including the costs of mechanisms
to separate the management and control of decisions.”
Finally, the authors claim that separation of management and control would be expected
more generally in financial mutuals, either complex or noncomplex. “Most organizations
characterized by separation of decision management from residual risk bearing are complex.
However, separation of the management and control of decisions contributes to the survival
of any organization where the important decision managers do not bear a substantial share
of the wealth effects of their decisions – that is, any organization where there are serious
agency problems in the decision process. We argue below that separation of decision
management and residual risk bearing is a characteristic of non-profit organizations and
financial mutual, large and small, complex and noncomplex. Thus, we expect to observe
separation of the management and control of important decisions even in small noncomplex
non-profits and financial mutuals where, ignoring agency problems in the decision process,
concentrated and combined decision management and control would be more efficient.” 67
The ultimate objective of the considered article is really to affirm that separation of
management and control is useful when information is complex, and the deriving
specialization increase the economic value of the company. Therefore, Buffett’s influence
in accepting a monistic governance system seems illogical under a Value creation
perspective. As analysed during the project, active ownership allows companies to better
their ESG behaviour, which is correlated to equity performances and, consequently, reduce
costs and increase competitiveness and profitability. So, even if active ownership is a very
effective practice to maximize shareholder value and improve long-term returns, Berkshire
Hathaway Inc. decided to have a passive control over its Cattolica Assicurazioni’ shares.
67 Fama, Eugene F.; Jensen, Micheal C., 1983, “Separation of Ownership and Control”, University of Chicago
University of Rochester
85
Chapter 4. Conclusions Berkshire Hathaway Inc.’s acquisition of the 9.047 % of Cattolica Assicurazioni’s share
price has been a Value investment so far. In fact, on the 6th of October 2017, date of
acquisition, the Italian company’s share price was undervalued and was promising positive
results over a long-term horizon. Intermonte SIM S.p.A., was recommending as
“Outperforming” the stock of the group led by Alberto Minali. Market price was equal to €
7.35 and the target price was expected equal to € 8.20: so, the Margin of Safety on that date
was 10.36 % deriving from 1 - (7.35 / 8.20) *100. Comparing the 6/10/2017 Margin of Safety
with the 6/10/2017 US Generic Government 10 Year Yield, the benchmark rate of return on
low risk investments, it is possible to see that the compensation for the risk involved in this
transaction is equal to the difference 10.36 % - 2.36 % = 8 %. So, Value investing in Cattolica
Assicurazioni at that time was meant to be a low risk investment with an interesting upside
over the long-run.
As of 15th of May 2018, data of the last month financial analysis published by Intermonte
SIM S.p.A on Cattolica Assicurazioni, the market price was € 8.49 and the expected target
price was € 10. So, in this case, the Margin of Safety was equal to 15.1 %, deriving from 1 -
(8.49 / 10) *100. Comparing the 15/05/2018 Margin of Safety with the 15/05/2018 US
Generic Government 10 Year Yield, it is possible to see that the compensation for the risk
involved in this transaction is equal to the difference 15.1 % - 3.07 %68 = 12.03 %. So, Value
investing in Cattolica Assicurazioni at that time was even less risky and more performing
over the long run than at time of acquisition.
As of 15th of June 2018, the Margin of Safety, or discount of the intrinsic value to the market
price is equal to 12.9 %, deriving from 1 - (7.71 / 8.85) *100. In fact, Intermonte SIM S.p.A.
estimates that the intrinsic value per share is equal to € 8.85.69 Comparing the 15/06/2018
Margin of Safety with the 15/06/2018 US Generic Government 10 Year Yield, it is possible
to see that the compensation for the risk involved in this transaction is equal to the difference
68 Bloomberg, 15 May 2018, “US Generic Government 10 Year Yield 69 Intermonte SIM S.p.A., 2018, “Cattolica Assicurazioni share price”
86
12.9 % - 2.92 %70 = 9.98 %. So, Value investing in Cattolica Assicurazioni today would be
even less risky and more performing over the long run than at time of acquisition.
The Margin of Safety analysis confirms that the Value investment in Cattolica Assicurazioni
is still very actual and successful.
As of today, 15th of June 2018, the company’s close share price is equal to € 7.71, which is
a bit higher than the share price at time of acquisition (€ 7.35). Considering the total number
of ordinary shares of Cattolica Assicurazioni equal to 174,293,926, the market capitalization
at that date is € 1,343,806,169.46, which can be rounded to € 1.3438 billions. At time of
acquisition, when the price per share was equal to € 7.35, the market capitalization was equal
to € 1.2810 billions. So, on the 15th of June 2018, the difference between the acquisition time
and current market capitalization correspond to € 0.0628 billions, so € 62.8 millions, which,
multiplied for Buffett’s stake of 9.047 %, registers an upside in Berkshire Hathaway Inc.’s
investment equal to € 5.681 millions.
Only one week ago, on the 8th of June 2018, the upside in Berkshire Hathaway Inc.’s
investment was equal to € 0.316 millions, therefore the value created in just a week has been
equal to € 5.365, € 5.681 millions - € 0.316 millions. This gives a precise idea of how much
market prices are variable in the short run and how much financial markets, which are very
volatile, can be easily influenced by socio-political events, as already discussed in the
previous chapter. Even if the investment seems to be successful in the short run, it will be
fundamental for Berkshire Hathaway Inc. not to let the market overcome its emotional state
and keep a long-term focus.
At the present date, 15th of June 2018, the Return on Investment is equal to € 5.681 millions
which correspond to the 4.90 % of the amount invested, € 115.8 millions. Compared to the
46.43 %, return associated to the value created at the time of Maximum market capitalization
on the 25th of January 2018 equal to € 53.77 millions, this return is quite small, but still gives
a positive signal. In fact, the difference between those two returns is equal to 41.53 %, 46.43
% - 4.90 %, so the value creation in the long run is consistent with respect to the original
amount invested. Making predictions on the future share price is very difficult and the only
70 Bloomberg, 15 June 2018, “US Generic Government 10 Year Yield”
87
certainty remains the uncertainty and volatility of financial markets. Only the long horizon
will be able to judge the Value investment made by Warren Buffett on Cattolica
Assicurazioni, but as of now, the calculated upside show positive economic performances.
We know that companies could be undervalued because of distortions in the valuations. It is
interesting to understand how the investor can benefit from them perhaps after structural
changes in the corporate governance. As we discussed in the previous chapter, this is what
happened in the case of Cattolica Assicurazioni. If the economic performances of Value
investments, and in this case, of Warren Buffett’s acquisition of the Italian insurance
company, must be judged over the long run, the CEO of Berkshire Hathaway Inc. has
managed to produce tangible structural changes in the governance system of Cattolica
Assicurazioni during a short-term period.
In fact, on the 28th of April 2018 the Verona based company has switched from a traditional
governance system to a monistic one. The changes caused by this switch have already been
analysed, but it will be again interesting to understand why the American investor accepted
this decision.
Along the project, I reported the study on the correlation between ESG investing and equity
performances, which reduces costs and increases competitiveness and profitability. This is
possible when the shareholder exercises an active ownership which, as ultimate objective,
allows for a shareholder value’s maximization and an improvement in the long-term results.
Furthermore, the article of Eugene F. Fama and Micheal C. Jensen, “Separation of
Ownership and Control”, affirms the economic superiority of separation between
management and control with respect to the unification of them, brought by the monistic
system.
The key to understand why Berkshire Hathaway Inc. has accepted a corporate governance
system that, as the studies reported, should produce less efficient economic performances, is
the concept of simplification. The monistic system, in fact, aims at increasing social
cohesion, rationalizing the system of controls and reducing the conflicts of interests which
can represent a big cost and an inefficiency for the business. Even if he also thinks that
director power is strongest when management and controlling shareholders are separated,
88
this time he opted for a simplification of the business which can help avoid the expensive
conflicts of interests.
Berkshire Hathaway Inc. hasn’t asked yet for any memberships in the Cattolica
Assicurazioni’s board and if it will keep this passive position there will be no reason to make
that kind of request. Warren Buffett fully trusts the management of Cattolica Assicurazioni
represented by Alberto Minali and for the moment the choice has economically been
rewarding his Value investment. In Italy, even considering the shocks to the local financial
market caused by the political instability and the speculation, it is possible to find performing
stocks that are attractive to Value investors. Since Warren Buffett’s acquisition, Cattolica
Assicurazioni’ stock has been outperforming the FTSE-MIB Index.
To conclude, also a passive approach, which is completely opposed to the acclaimed active
ownership and to the strategy deriving from the separation of ownership and control, could
become a winning strategy, but time will reveal the right answer. In fact, as stated by
Benjamin Graham, “In the short run, the market is a voting machine but in the long run, it is
a weighing machine.”
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Summary
Chapter 1. Value Investing 1.1. History and definition
In 1920, Benjamin Graham and David Dodd developed Value investing, a methodology
which has proven to be the most performing investment strategy ever developed, despite the
many and unpredictable changes in the economy and financial markets during the last
century.71 Benjamin Graham is considered the undisputed father of Value investing, the
investment philosophy that considers the fundamental data of the stocks, as well as the
inspiring master of Warren Buffett, the greatest living investor. Warren Edward Buffett is
considered the best Value investor of all times, nominated the “Oracle of Omaha”.
Through his books, “The Intelligent Investor” and “Security Analysis”, Graham states that
investors need to direct their investments towards shares of companies with great financial
stability, solid fundamentals and excellent growth prospects for their business. The advice
of Graham is to neglect the temporary fluctuations of the market and focus on the long-term
growth of winning businesses, as summarised in the parable of Mr. Market.72 The stock
market is subject to large and recurrent fluctuations. The intelligent investor should take
advantage of them exploiting the Pricing approach to profit from undervalued stock.
1.1.1. The theoretical approach
Value investing is the art of buying shares that the market offers at a significant discount
compared to their intrinsic value, or Target price, the actual and perceived value of a
company. The discount of the intrinsic value to the market price is the Margin of safety73,
that allows an investment to be made with minimal downside risk74. When the market price
71 Columbia Business School, “The Heilbrunn Center for Graham & Dodd Investing - Value Investing History” 72 Graham, Benjamin, 1949 (revised edition), “The Parable of Mr. Market”, “The intelligent investor” 73 Margin of safety is a principle of investing in which an investor only purchases securities when the market
price is significantly below its intrinsic value. 74 Downside risk is an estimation of a security's potential to suffer a decline in value if the market conditions
change, or the amount of loss that could be sustained because of the decline. Depending on the measure
90
is lower than the discount to the intrinsic value, Value investors finally decide to buy and
engage in a long-term Value investment, which hopefully will create value for them. Value
investors look for easily understandable companies with cheap valuation parameters,
typically low multiples of their profits or assets, for reasons that are not justified in the long
run. The reasons why the stocks present lower values may be many, but the most common
are: disappointing short-term profits, markets fall, bad news, cyclical fluctuations.
The Value investing approach requires a contrarian mentality75 and a long-term investment
horizon. It is assumed that in the long run stocks will return to the intrinsic value, giving the
investor the opportunity to sell and earn the value from the investment. Value investing seeks
to exploit the irrational behaviour of emotional investors.
1.1.2. The practical methodology
The main idea is to evaluate companies with a different method from the traditional
Discounted Cash Flow (DCF) model to determine, with less uncertainty, the intrinsic value
of the analysed share and compare it with the market price. The Discounted Cash Flow
(DCF) model requires that the value of the company is given by the sum of the future cash
flows available for investors, discounted to the Weighted Average Cost of Capital (WACC).
The value calculated in this way is subject to great variability due to the uncertainty in the
assumptions underlying the calculation: the longer the time horizon, the greater the
uncertainty. Value Investing is essentially based on three parameters, all needed to get the
long-awaited intrinsic value: Book Value of Assets, Earnings Power and Growth Value. The
intrinsic value of the company will be then compared with the market price on the stock
exchange, which very often reflects more the volatile trend of the markets than its substantial
value.
More specifically, comparing the Book Value of Assets with the Earnings Power it can be
determined if the company’s management is creating value: when the value of Earnings
Power is higher than the Book Value of Asset, the company has a competitive advantage, a
used, downside risk explains a worst-case scenario for an investment or indicates how much the investor stands
to lose. 75 Contrarian mentality involves hunting for stocks that are seemingly not trading up to their value potential.
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franchise. The franchise, to exist, must be sustainable over the long term to guarantee future
returns superior than the Weighted Average Cost of capital (WACC) and a possible
profitable growth.
A company has a franchise when there are barriers to entry that alienate potential competitors
or make new entrants work at a competitive disadvantage. The advantage must be
identifiable and structural and derives exclusively from the presence of at least one of the
following four factors: protection, lower costs of production, captive customers or
economies of scale. Again, the value of growth can be considered if and only if the company
enjoys a sustainable competitive advantage. It is fundamental to keep in mind that Earnings
Power higher than Book Value of Assets does not necessary mean Buy: in case of a well-
established company, the market price will probably be higher than the intrinsic value.
1.1.3. Main metrics and Graham’s 7 Golden rules
Knowing the main metrics is a must for all investors. There are dozens of metrics that can
be used to evaluate a stock, but the following are some of the best used by Value investors
to identify undervalued stocks: Price to Earnings Ratio (P / E), Price to Equity (Book Value)
ratio (P / BV), Price to Earnings to growth ratio (PEG), Debt to capital ratio, Current ratio
and Return on equity (ROE).
In his book, Graham enunciates the 7 Golden rules not to depart from in the choice of stocks:
adequate size of the company, financial situation sufficiently robust, stability of earnings,
dividends, profit growth, moderate Price / Earnings ratio, moderate Price / Equity ratio. All
these rules are used to create a good Margin of safety that serves to exclude purchases when
a too large portion of the price paid depends on the expected profits that are increasing in
the future, a factor that greatly increases the risks of investment. Graham's final advice to
the defensive investor is to buy a very diversified portfolio consisting of the best stocks and
bonds with a high level of rating.
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1.2. Investors or Speculators, Contrarian or Momentum?
Graham theorized a well-known distinction between Investors and Speculators. The former
are the analysts, who ensure an adequate return based on a careful acquisition of the
securities. The latter, those who study more the timing of intervention than the substance of
the companies investigated. Moreover, investors can choose two different investment
strategies: Contrarian or Momentum. Richard H. Driehaus76 developed Momentum
investing as a strategy to exploit the most recent market trends, while Warren Buffett,
sponsors a Contrarian approach, whose investment decisions deviate from the general
direction of the markets. Momentum investors buy expensive stocks and wait for prices to
rise higher before selling for a profit: the greatest risk Momentum investors face is entering
a position at the wrong time, topically when the stock has already had its best trends.
1.2.1. Value investors Vs Growth investors
The bottom 30 % of US securities have experienced an average annual return of 13.7 % to
investors in the period between 1926 and 1995; on the contrary, the top 30 % by price has
experimented, with similar conditions, average annual returns of 9.6 %. These data confirm
the thesis of the triumph of Value investing, surpassing by performance the most expensive
stocks 91 % of the times over the period observed. There was a margin of 12.9 % points in
the period 1996-99 between the S&P Value index and S&P Growth index, in favour of the
latter. In the last seventeen years, the returns conferred by the two approaches have alternated
dividing the role of performing investing model: the period from 2000 to 2007 was
dominated by Value investing and subsequently, until 2015, the S&P Growth index scored
average upper results. In the last years, Value strategy has turned the performances in its
favour.
Benjamin Graham was one of the most important exponents of the Fundamental analysis,
which proceeds from the postulate that the stock exchanges, especially in the medium-short
period, are excessively changeable and unreliable and that in the long run, a good and careful
76 Driehaus Capital Management of Chicago, is one of the major small and medium-sized manager companies
and its success led the founder to be included in the Barron's All-Century Team, a group of 25 fund managers
that includes investment luminaries like Peter Lynch and John Templeton.
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evaluation of a budget always ticks on contingencies and momentary whims of investors.
The other major investment school is the Technical analysis of Growth investing, which
bases its choices on the performance of the value of the stock over time. The experts of
Technical analysis are convinced that the market is always right and that the price contains
itself all the elements of a stock, explaining every information and every possible
development at the time known.
1.2.2. Value investing and the long term historical cycles
Value investing has proven to outperform long-term historical cycles in the last 100 years.
Overall, there are about 70 % more Growth funds on the market compared to Value funds.
Value investments are sometimes judged monotonous. Many companies pay boring
dividends, while others may have had low performances and be sold. Generally, Growth
investing is sexier than Value Investing. The reason why Value investing works in the long
run is precisely because it often does not work in the medium run. In fact, Growth has
exceeded the Value most of the time in the last 5 and 10 years, but the tide is slowly starting
to turn in favour of Value.
Although it has been easier to sell the Growth so far, this trend will not last forever. With
the launch of Smart beta funds, there will probably be a gap between Growth and Value
funds to shrink significantly as most of the Smart beta funds are out of balance with Value
stocks. Smart Beta investing combines the benefits of passive investing and the advantages
of active investing strategies.77 The main objective of Smart Beta is to obtain Alpha, lower
risk, or increase diversification at a cost lower than traditional active management and
77 Patrick O'Shaughnessy, O'Shaughnessy Asset Management.
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marginally higher than straight index investing.78 It attempts to build an optimally diversified
portfolio. In effect, Smart Beta is a mix of efficient-market hypothesis79 and Value investing.
1.2.3. Index funds as best Investments
Warren Buffett affirms that for an average investor the best way to make money is through
an investment fund indexed to the entire stock market. An index investment fund80 is a fund
that has the objective of reproducing the trend of an entire reference price list / index. The
index funds are managed passively and therefore have lower operating costs compared to
the common actively managed fund. This simple investment strategy was spread by John C.
Bogle, founder of The Vanguard Group, who thinks that, to invest successfully, it is
necessary to be a long-term investor, so that the value from the invested capital can be
appreciated thanks to the growth of fundamental values and the real economy.
Based on the performance of the US stock market in the last century, over a time horizon of
a single year the return on the entire stock market can fluctuate between -11.1 % and + 25.1
% on average. Over a ten-year horizon, the yield may fluctuate between + 2.4 % and + 11.2
% on average per year. And over a period of fifty years, yield stabilizes definitively,
oscillating between + 5.7 % and + 7.7 % on average annual – values extremely close to the
historical average of 7 %. The reason why the stock market provides a 7 % return over the
long term is mainly due to the growth in profits and dividends of listed companies., the return
derived from dividends and profits is identical to the 7 % return provided by the equity
78 Index investing is a passive strategy that aims to generate similar returns as a broad market index. Investors
use index investing to replicate the performance of a specific index – generally an equity or fixed-income index
– by purchasing Exchange-Traded Funds (ETF), marketable securities that track an index, commodity, bond,
or a basket of assets like an index fund. Among the advantages, index investing seems to outperform active
management over a long-time frame and eliminates many of the biases and uncertainties that arise in a stock
picking strategy. 79 Investment theory supporting the impossibility to “beat the market” because stock market efficiency causes
existing share prices to always incorporate and reflect all relevant information. 80 An index fund is a type of mutual fund with a portfolio constructed to match or track the components of
a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide
broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific
rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the
state of the markets.
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market itself. There are three variables that determine the yield on the long-term stock
market: dividend yield (%), rate of profit growth and change in the Price / Earnings ratio,
speculative component of the market.
Chapter 2. Main tractions and Warren Buffett’s holding
2.1. Dividends, ESG and Active ownership
2.1.1. Four Rule to earn via Dividends
The largest gains can be obtained from shares of companies that over time, year after year,
increase the number of dividends. In general, dividend-oriented investors should pay
attention to the following four rules: quality, discounted price, growth and volatility.
2.1.2. ESG: Equity performances and Active ownership
The first European study on the correlation between ESG and performance ratings,
conducted by the Politecnico di Milano School of Management81 and by Banor SIM82 reveal
that the shares of the most responsible companies in terms of Environmental, Social and
Governance are the most rewarded. The securities belonging to the basket of companies with
the highest ESG rating are those that perform better and that show both higher revenue
growth, better margins and dividend yield. So, the study states that the integration between
the ESG indicators and the classic economic-financial considerations used by analysts in the
Value investing approach is the best strategy, in terms of returns, to create efficient portfolios
81 The Politecnico di Milano School of Management, established in 2003, welcomes the multiple research,
training and consulting activities in the fields of economics, management and industrial engineering that the
Politecnico carries out through its various internal structures and consortium. 82 Banor SIM, present on the market since 1989 as a vehicle for the private banking activities of a group of
banks in northern Italy, was taken over in 2000 by a group of private investors and managers led by
Massimiliano Cagliero, the current CEO. The goal of Massimiliano Cagliero and its partners was to create an
independent private banking in Italy that would implement the principles of Value investing. Today it is one
of the leading Italian securities brokerage companies and specializes in capital management and investment
advice.
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and secure a competitive advantage in the long-term. In terms of volatility there are no major
differences between good and non-good securities. It has been studied that through proxy
voting and active engagement, companies could better their ESG behaviour, which is
correlated to equity performances and, consequently, reduce costs and increase
competitiveness and profitability. Therefore, active ownership is a very effective practice to
maximize shareholder value and improve long-term returns.
2.2. Berkshire Hathaway Inc.: History and investing activity
Berkshire Hathaway Inc. is one of the holding companies that registers more investors each
year and its CEO is Warren Buffett. The total turnover of Berkshire Hathaway Inc. is around
$ 150 billions, and the estimated market value is about $ 400 thousand. It is at the top of the
Fortune 500 companies, as reported in the top 10 list below. Berkshire Hathaway has
generally proved to outperform the S&P 500 Index over the period from 1965 to 2017.
Initially, Berkshire Hathaway Inc. had essentially an insurance core, but over the years it
expanded with a portfolio that covers space in various sectors and in many companies.
Buffett arrived in 1962, and started buying Berkshire Hathaway Inc.’s Value shares until
taking control of it. Speaking about actual data, Berkshire Hathaway Inc. closed the first
negative quarter of 2018 in red for the first time in nine years. Due to the implementation of
new accounting rules that require gains or losses on unrealized investments, the first quarter
closes with a red of $ 1.14 billions: this is the first loss since 2009.
2.2.1. Berkshire Hathaway Shares A and B
Berkshire Hathaway Inc.’s shares are listed at the New York Stock Exchange (NYSE).
There are only two types of Berkshire Hathaway Inc.’s shares: Class A Shares (BRK.A) and
Class B Shares (BRK.B). The main difference is the price, much higher in Class A. The
stock, from 1996 to today, has had a steady growth.
To predict the performance of the Berkshire Hathaway Inc.’s shares in the short term, it will
be important to consider the company's events, such as corporate factors at the same time
they are announced. About the long-term performance of the Berkshire Hathaway Inc.’s
shares, before investing in Berkshire Hathaway Inc.’s shares, the last financial statements
and statements of the holding should therefore be observed, thanks also to the useful
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synthesis of analysts, who usually take stock of the situation, underlining the possible
changes in the structure of the holding company, which affect the performance of the share.
2.2.2. Berkshire Hathaway Inc.’s main investments in 2017
There are about 6 companies fully owned by Berkshire Hathaway, such as GEICO insurance
company, Dairy Queen chain, Bankamin Moore Paints, Netjets, Duracell, and Fruit of the
Loom. In addition to them, there is also a broad portfolio of shares owned by Berkshire
Hathaway Inc. The 10 biggest investments made by Warren Buffett as of end of the fourth
quarter of 2017 are the following: Apple, Wells Fargo, Bank of America, Coca-Cola,
American Express, Phillips 66, US Bancorp, Moody's Corporation, Bank of New York
Mellon and Southwest Airlines.
Chapter 3. Value investing in Italy
3.1. FTSE-MIB Index stocks that pass the Buffett test
On the 6th of October 2017, only 14 companies, out of 40, listed on the Borsa Italiana FTSE-
MIB Index83, could pass the Buffett test. Among them, especially financial companies such
as Assicurazioni Generali, Intesa Sanpaolo, Mediobanca, Unicredit, UnipolSai and Cattolica
Assicurazioni, but also industrials, as Telecom Italia, Fca, Enel and Poste Italiane, are part
of that privileged group. The selection of companies to Value invest in depends on the
Buffett test strategy, and three main data must be considered when putting in practice this
strategy: a Price / Equity (Book Value) ratio not exceeding 1.5, a Price / Earnings ratio not
exceeding 15 and the product of the previous two ratios not exceeding 22.5.
83 FTSE-MIB is the leading benchmark Index for Italian equity markets. This index, which captures about 80%
of the internal market capitalization, is made up of the various Italy’s Industry Classification Benchmark (ICB)
sectors’ primary importance and high liquidity companies. The FTSE-MIB Index measures the performance
of 40 Italian stocks and aims to reproduce the weightings of the enlarged sector of the Italian stock market. The
Index is derived from the universe of securities trading on the main stock market of Borsa Italiana (BIt). Each
security is analysed by size and liquidity and the Index provides a comprehensive representation by sector. The
FTSE MIB Index is weighted by market capitalization after adjusting the components for the free float.
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In the list there are three insurance companies, Cattolica Assicurazioni, UnipolSai and
Generali Assicurazioni. It is, in fact, relevant to highlight the presence of insurance
companies since Warren Buffett and his holding, the Berkshire Hathaway Inc., are primarily
focused on Value investing in insurance businesses. In fact, between the 5th and the 6th of
October 2017, Warren Buffett Value invested in Cattolica Assicurazioni that has got the
second-best Product between Price / Earnings and Price / Equity (Book Value) ratios of the
list, equal to 9.18. UnipolSai has got a Product value, 9.30, while Generali Assicurazioni
presents a higher Product value, 10.53. Considering the last three years, Cattolica
Assicurazioni’ stock has registered a higher annual growth than the FTSE-MIB Index.,
especially since Buffett’s acquisition.
3.1.1. Cattolica Assicurazioni and its acquisition
Cattolica Group is one of the leading companies in the Italian insurance sector and offers a
wide range of insurance and financial solutions focused on the Life and Non-Life sectors.
The company has been listed on the Milan Stock Exchange since November 2000, has its
headquarters in Verona. On the 5th of October 2017 Berkshire Hathaway Inc., acquired the
9.047% in Cattolica’s share capital, granting itself 15.7 million shares.84 Warren Buffett, so,
invested € 115.8 millions in the Italian insurance group led by Alberto Minali85.
The transaction was executed on the 6th of October at € 7.35 per share through the Italian
independent investment bank Intermonte SIM S.p.A., that was recommending the stock as
“Outperforming”, in a one year horizon, due to a market price equal to € 7.35 and an expected
target price of € 8.2. The Margin of Safety on the acquisition date was equal to 10.36 %,
calculated as 1 - (7.35 / 8.20) *100. Comparing the 6/10/2017 Margin of Safety with the
6/10/2017 US Generic Government 10 Year Yield, the benchmark rate of return on low risk
investments, it is possible to see that the compensation for the risk involved in this
84 Cattolica Assicurazioni, 2017, “Annual Report and Financial Statements” 85 Alberto Minali has been Chief Executive Officer and Director of Società Cattolica Assicurazioni (Società
Cooperativa) since June 1, 2017. Minali served as Chief Financial Officer at Assicurazioni Generali SpA
(Company) from October 2012 to January 2017. Prior to taking the position, he spent more than four years as
Portfolio Manager at Eskatos Capital Management Sarl, which he set up himself in 2008, focusing on
management of hedge funds active in the reinsurance
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transaction is equal to the difference 10.36 % - 2.36 %86 = 8 %. So, Value investing in
Cattolica Assicurazioni at that time was meant to be a low risk investment with an interesting
upside over the long-run.
Regarding possible aims in terms of presence in the council or management, it is usually not
in the conglomerate policy to affect the governance of the investee companies, especially if
the share is not 100 % controlled. On the 28th of April 2018, the Board of Directors of
Cattolica Assicurazioni approved at 99.9 % the new statute with the adoption of a monistic
governance system and a reduction in the number of board members to 17. The cooperative
spirit, and so the capita vote, was confirmed, but the change aims to enhance the presence of
institutional investors by providing for a 5 % increase in the shareholding capitalization for
companies and confirming the shareholding threshold for natural persons at 0.5 %. The goal
is to attract other investors, encouraging their arrival, as happened, with the landing of
Warren Buffett.”. As of June 2018, Berkshire Hathaway Inc. has not given any signal either
to present a list or request to have a slot in the board.
3.1.2. Cattolica’s share price and market capitalization
The company share price registered at the date 08/06/2018 is € 7.37. In the last month, the
price per share has been losing value, -17.23 %, passing from € 8.64 per share, at the
beginning of May 2018, to the already mentioned € 7.37 per share. In a period of just 3 years
the spread between the Maximum and Minimum prices is considerable: the difference, in
fact, between the Maximum price € 10.96 and the Minimum price € 4.95 is equal to € 6.1
per share. In 2017, the Max values have increased consistently, especially after the 6th of
October, when the acquisition was accomplished. From the 6th of October to the 31st of
December 2017, the share price has had a growth of 38 %. Notably, the periods with the
highest volatility have been 2017, especially the Pre-acquisition 2017, and 2018, until now.
These periods show the highest Maximum-Minimum share price values. On average, the
highest share price values pertain again to the Post-acquisition 2017. Since 2015 and before
the acquisition, the share price of the insurance company has never been so high. Warren
Buffett has had a very positive effect on the company’s performances until now.
86 Bloomberg, 6 October 2017, “US Generic Government 10 Year Yield”
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The total number of ordinary shares of Cattolica Assicurazioni is equal to 174,293,926. Each
share has a nominal value of € 3, so the share capital totals € 522,881,778.87 Considering the
close price on the 8th of June 2018, the market capitalization at that date is €
1,284,546,234.62, which can be rounded to € 1.2845 billions. At time of acquisition, when
the price per share was equal to € 7.35, the market capitalization was equal to € 1.2810
billions. On the 8th of June 2018, the difference between the acquisition time and current
market capitalization correspond to € 0.0035 billions, so € 3.5 millions, which, multiplied
for Buffett’s stake of 9.047 %, registers an upside, even if small, in Berkshire Hathaway
Inc.’s investment equal to € 0.316 millions.
3.2. Corporate governance as a key driver in Buffett’s model
In Warren Buffett’s model of corporate governance, managers feel like owners of
shareholder capital. They put shareholders’ interests at the top, but even first-rate managers
will sometimes have conflicts of interests with shareholders. It is important that managers
properly and easily communicate with shareholders and that hierarchies or chain of
command do not exist. Buffett proposes to pay great attention in identifying CEOs who will
perform capably regardless of weak structural restraints and to the separation between
managers and controlling shareholders. Commonly, the biggest troubles for managers
happen when controlling shareholders are missing. To increase its effectiveness, the board
should have small dimension and include outside directors mostly.
Many managers are paid stock options whose value increases simply by retention of
earnings. By retention of earnings, in fact, managers can claim annual earnings increases
without any individual performance and contribute towards the return on capital. Stock
options often transfer shareholder’s wealth to managers. Buffett retains that executives
should be measured by performance, that should be measured by profitability. Stock options,
if used, should be related to individual performances, rather than corporate performances,
and prices based on business value.88
87 Share capital, Cattolica Assicurazioni, company’s official investor relations web page. 88 June Rhee; HLS Forum on Corporate Governance and Financial Regulation (Co-editor), March 29, 2013,
“Governance Buffett Style”, “Harvard Law School Forum on Corporate Governance and Financial Regulation”
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3.2.1. The value of corporate governance at Cattolica
An important reason that attracted Warren Buffett to Value invest in Cattolica Assicurazioni
is the company’s share acquired which then translates into the potential ability to influence
the corporate governance. It is interesting to calculate what stake he would have acquired in
the other two insurance companies, considering the different shareholding structures, by
investing the same amount invested in Cattolica Assicurazioni both at time of acquisition
and at current time. On the 6th of October 2017, time of acquisition of Cattolica
Assicurazioni’s 9.047 % shares, Warren Buffett would have obtained the 2.087 % shares of
UnipolSai and the 0.473 % shares of Generali Assicurazioni. On the 7th of June 2018, time
of current analysis, Warren Buffett would have obtained the 8.650 % shares of Cattolica
Assicurazioni, the 2.176 % shares of UnipolSai and the 0.513 % shares of Generali
Assicurazioni.
3.2.2. The unification of Ownership and Control at Cattolica
The question is why Cattolica Assicurazioni decided to adopt a monistic system, which is
characterized by the fact that the control body is not separated from the management body,
but is constituted within it. Simplification is the underlying motivation for the new corporate
governance trend that goes towards the monistic system. The monistic should precisely help
to increase social cohesion, rationalize the system of controls and overcome the
embarrassment of companies that have chosen to present the list of the outgoing board, but
that avoid doing so because of the statutory board which should control it.89
If, from one side, the reason of the governance choice made by the Verona based company
is welcoming new and foreign institutional investors, from the other side, it is in net contrast
with what Eugene F. Fama and Michael C. Jensen express in their famous article “Separation
of Ownership and Control”. They think that decision managers are more likely to take
actions that deviate from shareholders’ interest when effective control procedures are
missing. Therefore, the conversion of the under-analysis insurance company into a monistic
system seems to represent an inefficient choice. Combination of decision and control
functions is efficient in small noncomplex organizations because the benefits of unrestricted
89 Il Sole24Ore, 15 June 2018, “Perchè il monistico piace agli investitori”
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risk sharing and specialization of decision functions are less than the costs that would be
incurred to control the resulting agency problems. Since Cattolica Assicurazioni is listed, it
is considered a complex company, and being a mutual insurance company it should have a
separation of decision and control functions.90
The reason for the separation could be that Warren Buffet, as institutional investor, doesn’t
look for an active approach in the governance of Cattolica Assicurazioni and doesn’t need
to have a supervisory board that defends his interests. He fully trusts the management, and
it was probably to avoid the conflicts of interests mentioned in the previous pages that he
pushed for that unification of management and control. Simplifying the management, Buffett
maintains a passive role towards his shares and give full support and trust to the individual
board of directors, represented by Alberto Minali. No conflicts of interests should happen
but, apparently, less efficiency will lead to poorer economic returns. In fact, the authors
affirm that more economic benefits happen when a complex organisation has got separation
of management and control.91 Moreover, the lack of an active ownership would signify a
less effective practice to maximize shareholder value and improve long-term returns.
Chapter 4. Conclusions
Berkshire Hathaway Inc.’s acquisition of the 9.047 % of Cattolica Assicurazioni’s share
price has been a Value investment so far. In fact, on the 6th of October 2017, date of
acquisition, the Italian company’s share price was undervalued and was promising positive
results over a long-term horizon. Intermonte SIM S.p.A., was recommending as
“Outperforming” the stock of the group led by Alberto Minali. Value investing in Cattolica
Assicurazioni at that time was meant to be a low risk investment with an interesting upside
over the long-run.
As of 15th of May 2018, the market price was € 8.49 and the expected target price was € 10.
Value investing in Cattolica Assicurazioni at that time was even less risky and more
90 Fama, Eugene F.; Jensen, Micheal C., 1983, “Separation of Ownership and Control”, University of Chicago
University of Rochester 91 Fama, Eugene F.; Jensen, Micheal C., 1983, “Separation of Ownership and Control”, University of Chicago
University of Rochester
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performing over the long run than at time of acquisition. As of 15th of June 2018, Value
investing in Cattolica Assicurazioni today would be even less risky and more performing
over the long run than at time of acquisition. The Margin of Safety analysis, confirms that
the Value investment in Cattolica Assicurazioni is still very actual and successful.
On the 15th of June 2018, the company’s close share price is equal to € 7.71, which is a bit
higher than the share price at time of acquisition (€ 7.35). Considering the total number of
ordinary shares of Cattolica Assicurazioni equal to 174,293,926, the market capitalization at
that date is € 1,343,806,169.46, which can be rounded to € 1.3438 billions. So, on the 15th
of June 2018, the difference between the acquisition time and current market capitalization
correspond to € 0.0628 billions, so € 62.8 millions, which, multiplied for Buffett’s stake of
9.047 %, registers an upside in Berkshire Hathaway Inc.’s investment equal to € 5.681
millions. Only one week ago, on the 8th of June 2018, the upside in Berkshire Hathaway
Inc.’s investment was equal to € 0.316 millions, therefore the value created in just a week
has been equal to € 5.365, € 5.681 millions - € 0.316 millions. This gives a precise idea of
how much market prices are variable in the short run and how much financial markets, which
are very volatile, can be easily influenced by socio-political events, as already discussed in
the previous chapter.
At the present date, 15th of June 2018, the Return on Investment is equal to € 5.681 millions
which correspond to the 4.90 % of the amount invested, € 115.8 millions. Compared to the
46.43 %, return associated to the value created at the time of Maximum market capitalization
on the 25th of January 2018 equal to € 53.77 millions, this return is quite small, but still gives
a positive signal. Making predictions on the future share price is very difficult and the only
certainty remains the uncertainty and volatility of financial markets. Only the long horizon
will be able to judge the Value investment made by Warren Buffett on Cattolica
Assicurazioni, but as of now, the calculated upside show positive economic performances.
If the economic performances of Value investments, and in this case, of Warren Buffett’s
acquisition of the Italian insurance company, must be judged over the long run, the CEO of
Berkshire Hathaway Inc. has managed to produce tangible structural changes in the
governance system of Cattolica Assicurazioni during a short-term period. The key to
understand why Berkshire Hathaway Inc. has accepted a corporate governance system that,
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as the studies reported, should produce less efficient economic performances, is the concept
of simplification.
Berkshire Hathaway Inc. hasn’t asked yet for any memberships in the Cattolica
Assicurazioni’s board and if it will keep this passive position there will be no reason to make
that kind of request. Since Warren Buffett’s acquisition, Cattolica Assicurazioni’ stock has
been outperforming the FTSE-MIB Index. To conclude, also a passive approach, which is
completely opposed to the acclaimed active ownership and to the strategy deriving from the
separation of ownership and control, could become a winning strategy, but time will reveal
the right answer. In fact, as stated by Benjamin Graham, “In the short run, the market is a
voting machine but in the long run, it is a weighing machine.”
105
Appendix
Figure n.1.1
Margin of safety and buy / sell conditions
Source: Denker Capital – investment philosophy
Figure n.1.2
Annualized excess return over the period 1963 – 2017
Source: Patrick O'Shaughnessy, O'Shaughnessy Asset Management
106
Table n.1.1
US Value and Growth equity funds
Source: Reuters
Figure n.1.3
Dow Jones Industrial Average Index’s trend January 1915 - June 2018
Source: Dow Jones Industrial Average, 2018, “100 Year Historical Chart”
107
Figure n.2.1
S&P 500—Energy stocks, August 1996 through December 2011: Dividend Yield
Source: Credit Suisse Quantitative Equity Research
Figure n.2.2
S&P 500 – Energy stocks, August 1996 through December 2011:
Dividend Yield and Pay-Out
Source: Credit Suisse Quantitative Equity Research
108
Figure n.2.3 S&P 500 Dividend Aristocrats compared to S&P 500 over the last 10 years
Source: S&P Dow Jones Indices, 7 June 2018
Figure n.2.4
Hypothetical Growth of 1 Million from January 1928 to December 2017
Source: Kenneth R. French and Centre for Research in Security Prices (CRSP),
1 January 1928 to 12 December 2017
109
Figure n.2.5
S&P 500 Index: Dividend Growers Have Outperformed Over Time
Hypothetical performance of $100 invested in each of the five strategies (1972–2013)
Source: Ned Davis research, 31 December 2013
110
Figure n.2.6
Relative Performance of the S&P 500 low Volatility Index and the S&P 500
Source: Standard & Poor’s 30 September 2011
111
Figure 2.7
Cumulative return on the Stoxx® Europe 600 index securities, based on the ESG rating
Source: Banor SIM S.p.A & Politecnico Milano 1863 School of Management
112
Table n.2.1
Top 10 Fortune 500 companies
Source: Fortune 500
113
Table n.2.2
Berkshire’s Performance Vs the S&P 500
Berkshire Hathaway Inc., 2017
114
Figure n.2.8
Berkshire Hathaway Inc. Class A shares quote (BRK.A)
Source: New York Stock Exchange (NYSE), 14 June 2018
Figure n.2.9
“Berkshire Hathaway Inc. Class B shares quote (BRK.B)”
Source: New York Stock Exchange (NYSE), 14 June 2018
115
Figure n.2.10
Berkshire Hathaway Inc.’s Portfolio
Source: Berkshire Hathaway Inc.’s Portfolio
116
Table n.2.3
15 common stock investments that in 2017 had the largest market value
Source: Berkshire Hathaway Inc.
Cost** corresponds at Berkshire Hathaway purchase price
117
Table n.3.1
FTSE-MIB companies under the Buffett Threshold on 6 October 2017
Source: Monica D’Ascenzo, 8/10/2017 Il Sole24Ore (Personal collection)
Date (06/10/2017) Price / Earnings Ratio Pirce / Equity Ratio (Price / Earnings X Price / Equity)Buffet test threashold < 15 < 1.5 < 22.5
Telecom Italia 10.88 0.80 8.70
Cattolica Assicurazioni 11.48 0.80 9.18
UnipolSai 10.46 0.89 9.30
Mediobanca 11.16 0.88 9.82
Ubi Banca 20.28 0.50 10.14
Fiat Chrysler Automobiles 7.00 1.46 10.22
Generali Assicurazioni 10.33 1.02 10.53
UniCredit 13.54 0.78 10.56
Poste Italiane 10.63 1.10 11.69
Intesa Sanpaolo 13.41 0.94 12.60
Exor 14.22 1.15 16.35
Banco Bpm 41.38 0.43 17.79
Enel 14.27 1.49 21.26
Saipem 29.43 0.76 22.36
FTSE-MIB companies under the Buffett Threshold on 06/10/2017
118
Table n.3.2
FTSE-MIB companies under the Buffett Threshold on 6 October 2017
Focus on Cattolica Assicurazioni
Source: Monica D’Ascenzo, 8/10/2017 Il Sole24Ore (Personal collection)
Date (06/10/2017) Price / Earnings Ratio Pirce / Equity Ratio (Price / Earnings X Price / Equity)Buffet test threashold < 15 < 1.5 < 22.5
Telecom Italia 10.88 0.80 8.70
Cattolica Assicurazioni 11.48 0.80 9.18
UnipolSai 10.46 0.89 9.30
Mediobanca 11.16 0.88 9.82
Ubi Banca 20.28 0.50 10.14
Fiat Chrysler Automobiles 7.00 1.46 10.22
Generali Assicurazioni 10.33 1.02 10.53
UniCredit 13.54 0.78 10.56
Poste Italiane 10.63 1.10 11.69
Intesa Sanpaolo 13.41 0.94 12.60
Exor 14.22 1.15 16.35
Banco Bpm 41.38 0.43 17.79
Enel 14.27 1.49 21.26
Saipem 29.43 0.76 22.36
FTSE-MIB companies under the Buffett Threshold on 06/10/2017
119
Figure n.3.1
FTSE-MIB Index compared to Cattolica Assicurazioni’ stock’s annual growth
Source: Borsa Italiana, June 2018
120
Table n.3.3
Cattolica Assicurazioni Ratings 2015 – 2018 by Intermonte SIM S.p.A.
Borsa Italiana, Intermonte SIM, “Cattolica Assicurazioni studies and reports”
(Personal collection)
Date Rating Price Target Price20/03/2015 Outperform 7.54 8.4014/05/2015 Neutral 7.62 8.210/08/2015 Neutral 7.21 813/11/2015 Neutral 7.22 811/03/2016 Neutral 6.1 717/05/2016 Neutral 5.7 708/08/2016 Neutral 5.59 723/11/2016 Neutral 5.33 720/03/2017 Outperform 6.23 7.503/05/2017 Neutral 8.7 8.11/05/2017 Outperform 8.1 8.225/07/2017 Outperform 7.24 8.204/08/2017 Outperform 7.29 8.207/11/2017 Outperform 7.29 8.216/11/2017 Outperform 9.02 10,530/01/2018 Neutral 10.65 1122/03/2018 Neutral 9.16 10.509/05/2018 Neutral 8.68 10.514/05/2018 Neutral 8.49 10
121
Figure n.3.2
Cattolica Assicurazioni’s ordinary share price, 8 June 2018
Source: Cattolica Assicurazioni, “The Cattolica stock”
122
Figure n.3.3
Cattolica Assicurazioni ordinary share price movements in the last 3 years
Source: Cattolica Assicurazioni, January 2015 – June 2018, “Price and Performance”
123
Table n.3.4
Cattolica Assicurazioni’s historical prices January 2015 – June 2018
Source: Cattolica Assicurazioni’s historical prices January 2015 – June 2018
(Personal collection)
Max/Min Share price Open High Low Close
Max 2015 7.50 7.55 7.43 7.50Min 2015 6.04 6.16 6.00 6.02Max-Min 2015 1.46 1.39 1.43 1.48
Max 2016 7.28 7.29 7.15 7.29Min 2016 5.02 5.05 4.95 4.98Max-Min 2016 2.26 2.24 2.19 2.31
Max 2017 9.58 9.60 9.37 9.53Min 2017 5.80 5.87 5.73 5.79Max-Min 2017 3.78 3.73 3.65 3.75
Max Pre-06/10/2017 8.24 8.34 8.13 8.24Min Pre-06/10/2017 5.55 5.71 5.55 5.69Max-Min Pre 06/10/2017 2.70 2.64 2.58 2.55
Max Post-06/10/2017 9.58 9.60 9.37 9.53Min Post-06/10/2017 8.60 8.70 8.14 8.58Max-Min Post 06/10/2017 0.98 0.90 1.24 0.96
Max 2018 10.85 10.96 10.50 10.73Min 2018 7.23 7.35 7.03 7.16Max-Min 2018 3.62 3.61 3.47 3.57
124
Table n.3.5
Cattolica Assicurazioni’s historical prices January 2015 – June 2018
Source: Cattolica Assicurazioni’s historical prices January 2015 – June 2018
(Personal collection)
Figure n.3.3
Cattolica Assicurazioni’s Market capitalisation October 2017 – June 2018
Source: Personal Collection
Average Share Price Open High Low Close
Average 2015 6.93 7.01 6.84 6.92
Average 2016 5.77 5.85 5.68 5.76
Average 2017 7.51 7.60 7.42 7.52
Average Pre 06/10/2017 7.03 7.11 6.94 7.04
Average Post 06/10/2017 9.11 9.23 8.98 9.10
Average 2018 9.08 9.19 8.93 9.05
125
Figure n.3.4
Cattolica Assicurazioni’s Market capitalisation October 2017 – June 2018
Source: Personal Collection
Figure n.3.5
Cattolica Assicurazioni’s shareholder’s structure
Source: Cattolica Assicurazioni, 2018, “members and shareholders”
126
Table n.3.6
UnipolSai’s share capital
Source: UnipolSai, 2018, Share Capital
Table n.3.7
UnipolSai’s Main shareholders
Source: UnipolSai, 2018, Shareholding structure
127
Figure n.3.6 Generali Assicurazioni, 16 May 2018, Ownership structure
Source: Generali Assicurazioni, 16 May 2018, Ownership structure
Table n.3.8
Past analysis of the companies’ stakes acquired by Buffett, 6 October 2017
Source: Personal collection
Ownership structure, Generali Assicurazioni, 16/045/2018
Source: Ownership structure, Generali Assicurazioni
Date (06/10/2017) Share price (€) Shares outstanding (Bil) Market Capitalization (Bil €) Buffet's share (%)
Cattolica Assicurazioni 7.35 0.17 1.28 9.04
UnipolSai 1.96 2.82 5.54 2.08
Generali Assicurazioni 15.61 1.56 24.43 0.47
128
Table n.3.9
Present analysis of the companies’ stakes acquired by Buffett, 7 June 2018
Source: Personal Collection
Date (07/06/2018) Share price (€) Shares outstanding (Bil) Market Capitalization (Bil €) Buffet's share (%)
Cattolica Assicurazioni 7.68 0.17 1.33 8.65
UnipolSai 1.88 2.82 5.31 2.17
Generali Assicurazioni 14.40 1.56 22.53 0.51
129
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