Value Investing Congress Blog

On Seeking Professional Help

By Dan Ferris

There’s much documentation to show that most investors – individual and professional alike – fail to adequately appreciate how difficult, and therefore rare, is the production of outsized investment returns.   I don’t want to suggest that you’re crazy to pursue such a goal, but I think most of us – again, individual and professional alike – ought to have no qualms about seeking, as it were, “professional help.”    

Seeking professional help means that, when the public equity markets offer you easy access to a great capital allocator, you should exploit the opportunity.   The names I’m talking about include the folks in Omaha, Loews, Sears Holdings, Leucadia National, Markel, Fairfax Financial Holdings and the one I own, for which I shall advocate forthwith, Alleghany Corporation (NYSE: Y).    

Aside from its well-covered large, successful bets on Burlington Northern and perhaps a dozen big cap energy stocks, Alleghany most recently found a sweet spot in its principal operating business, property and casualty insurance.   Unlike the rest of the property/casualty market right now, pricing in the California workers comp insurance is firming up.  Premiums soared earlier in the decade.   Employers screamed bloody murder.  The state passed sweeping reforms, and premiums fell 60% from 2003 – 2007.    

Today, it’s hard to get a rate cut without a stellar claims record.  One employer that saw a 46% reduction on its 2006 renewal, reports a 9% increase in 2007.   The California Workers’ Compensation Insurance Rating Bureau, a non-profit that tracks claims data, which recommended a double-digit cut last year, recommends a 4.2% increase in workers comp premiums this year.   

Right on cue, in July, Alleghany bought Employers Direct Corporation, one of the top 20 workers comp insurers in California, for $192.5 million.   Capital allocation certainly isn’t about calling insurance market bottoms.  Then again, happy accidents tend to happen to good professional helpers.    

Alleghany can be had today by paying $1 for each $1 of net assets, and 35 cents for all the future earnings and investment gains of chairman John Burns, CEO Weston Hicks, and their future successors.   The price doesn’t discount much certainty that Alleghany will find conservative enough investments that will achieve high enough returns over the long term.   I’m betting it will find them.  It is arguably the cheapest, and not likely the riskiest, of the professional helpers: 

Professional help on sale (multiples of book value)
 

Alleghany’s $4.7 billion of investments (and $3.2 billion market cap) doesn’t have the “bigness” problem they have in Omaha.   And Alleghany will certainly approach its larger pool of choices with its time-honored conservative, risk-averse posture.  The odds are squarely against similar treatment of our capital by most fund managers, whose results look like quackery next to those of our professional helper list.  

Yet, too many people persist in the conviction that they’ll make big returns (which is necessarily born of something other than experience).   This is expensive lunacy, however common a form.  I contend that easy access to good professional help tends to be undervalued at any given moment.  Consider the trillions in mutual and hedge funds doomed never to outperform.  If those investors ever got even a little bit wise, the above list, at a total market cap of $269 billion, is such a tiny drop in the bucket that the list could find itself trading at lofty multiples as lousy returns persist, which they will for the vast majority of market participants.  

 I suspect many stock market participants who felt sane last year feel crazy right now.   Next year and beyond, then, quality professional help might well command a premium price. 

 -Dan Ferris

Ferris Capital Management, LLC is an Oregon registered investment adviser www.ferriscapital.com

FULL DISCLOSURE:  I own or have trading authority over shares of Alleghany.   This should not be construed as an offer to buy or sell securities.