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Position Updates + A Useful Idea

Below, I update a couple of positions: Exor and Howard Hughes. And further down below, I answer a question posed on Twitter: “What is one idea or concept that you don’t think many people know about, but you find useful or interesting?”

As always, please do your own diligence. Remember I can sell at any time and I don’t have to tell you, etc. Please see our disclaimers.

Exor’s Partner Re Deal Falls Apart

Exor had a memorandum of understanding to sell Partner Re for $9 billion to Covéa. This deal fell apart as Covéa backed out. It is not surprising to see an M&A deal unwind. There’s been a bunch. But I’ll admit I was surprised this one fell apart for the reasons Insurance Insider articulated:

Exor shares took a big hit after the announcement. We were all looking forward to seeing what John Elkann, Exor’s headman, would do with all that cash. While I think I would’ve preferred the deal happened, I can’t be sure. Life has a way of surprising you. Just when you think you prefer X to happen, Y happens instead… and it turns out to be better than you expected.

Exor hosted a call today and basically made the case that Exor is better off with Partner Re. It is, perhaps, what you’d expect him to say. But in thinking about it, he may be right. (You can find the slides here).

Elkann emphasized that Covéa’s bid was unsolicited and the pandemic was known at the time of the bid. Elkann said Covéa walking away from the deal was a surprise. But going forward, Partner Re is in a good position and he said it was more valuable today than pre-COVID-19.

For one thing, insurance rates are on the rise. “We are transitioning from a soft market to a hard market,” Elkann said. He noted that Partner Re had among the highest solvency ratios in the industry at the end of Q1. COVID-19 losses have been minimal:

“PartnerRe is among the companies with the highest solvency ratio in excess of 250% at the end of Q1. Just to give you a comparison, Swiss Re is at 200% and SCOR at 210%. The company has a liquidity in excess of EUR 10 billion. And the losses that we have incurred linked to COVID-19 for Q1 were of $18 million, and they were mainly due to event cancellation, and we expect small underwriting losses for the remainder of 2020.”

Insurance Insider backs his claim on rising rates. They say there has been an “appreciable shift in market dynamics that has become apparent over the last three to four weeks.” Further:

“Conversations with a range of market sources across the underwriting-broking divide confirm that on reinsurance pricing all boats are being lifted by the rising tide within the US market, with international pricing lagging somewhat.

Multiple sources told this publication that across almost all lines US renewals are set to rise by at least 10 percent, with loss-free non-Florida clients renewing cat treaties set to be hit with increases in the 10-15 percent range at 1 June. General casualty and professional lines renewals are also comfortably in double-digit territory, although pre-existing dynamics may still be the primary driver of the rises.”

Partner Re seems to be cruising through the pandemic without major hits. It’s in great shape financially. And rates are rising. All in all, it may turn out to be a pretty good investment here.

I didn’t buy Exor’s stock because I thought they would sell Partner Re. Although, I did think it was a possibility. So, I still like Exor and I’m holding.

Howard Hughes Reports

Yes, I still own it. It’s been my worst performer by far and it’s no longer a top position (even though I haven’t sold a share). But I think it’s one of the better “recovery” stocks in my portfolio. I have a couple of new things I wanted to mention about it, partly in response to a reader’s email.

First thing: Howard Hughes (HHC) had its annual meeting. A shareholder asked about the company’s recent capital raise, saying it was dilutive. The chairman, Bill Ackman, of Pershing Square fame, took the question.

(Brief background here in case you missed: HHC raised ~$600 million by selling stock at $50, of which Ackman bought $500 million. This raised his stake to ~35% and caused many shareholders to howl that he had picked their pockets.)

Ackman agreed there was dilution. But then he made an interesting comment on just how much dilution he thought there was:


“The good news is the dilution is not that material. It's in the order of 10% to 12%. And to the extent that the capital is invested intelligently and opportunistically as opposed to defensively, things are not as bad as more draconian scenarios. The incremental capital will, one, allow us to continue to pursue projects that are very accretive to the value of the company and can sort of compensate for the dilution; and then if we find ourself, God bless, a year from now there's a vaccine, life returns to normal, the company is overcapitalized at that time.


I bolded the 10-12% because it gives you a window into what Ackman thinks net asset value (NAV) is today. Using rough math, we can gather he thought the company was worth $100 pre-raise.

Consider there were about 43 million shares outstanding before the raise. Let’s say they were worth $100 per share in NAV. That’s $4.3 billion in total NAV. Now, we add in 12 million shares at $50 per share, or $600 million.

So, the new total NAV is $4.9 billion. Divide that by the new share count of 55 million and you get $89 per share. That’s 11% dilution to existing shareholders. And it fits right in the middle of Ackman’s “10 to 12%.” (Again, rough math here, before banking fees, etc.).

Now, that $100 pre-raise NAV may be a burned down scenario reflecting impairments on numerous assets. (This was a stock where $170 NAVs were common, pre-pandemic). Or it may just be a number Ackman chose so it makes the raise look less dilutive than it was. Either way, I think it’s a low-end figure.

In any event, the shares are less than $50 as I write. The balance sheet is tanked up with cash. You have Ackman’s full attention now that he owns more than a third of the company (a sizable bet, even for him). And you have a burned down NAV that is nearly double the share price. NAV should grow nicely as the economy recovers and its development pipeline matures.

Of course, I would’ve preferred no dilution. But I think they did the prudent thing rather than risk having to do it later at a worse price if things didn’t improve. I know people have strong opinions about Ackman. I try to take the emotions out of it. For me, Ackman as Chairman with a big stake in the firm is a positive.

Second thing I wanted to mention: Earnings came out last week and the stock sold off. Maybe the seemingly large gap between revenue and expenses spooked people. I agree it looked ugly, but things will look a lot better as early as next quarter.

First, let’s look at what happened: Total expenses for the quarter came in at $298 million, down slightly from $300 million from the same quarter a year ago. Meanwhile, total revenues were $175 million, down from $354 million, as condos and home lot sales dropped big time. Ugliness.

But… expenses will be falling rapidly over the next quarter. Total expenses included $97 million in “Condominium rights and unit cost of sales.” This is a one-time cost related to “repairs and remediation on certain alleged construction defects at the Waiea condominium tower.” The company may well recover all of this, or some of it. But it will not recur.

So, that’s nearly one-third of expenses lopped off right there. The G&A line totaled $39 million – up from $25 million a year ago. Ugly again! But… This includes one-time items related to the company moving its headquarters and letting go of employees. HHC wants to get G&A down to a run rate of about $20 million per quarter. So, we should see G&A drop quite a bit in coming quarters (though it will be noisy until the end of Q3).

Just back out those two items alone and the company is nearly break-even on its income statement (and mildly cash flow positive). Then there are other expenses that should come down as things open up. For example, HHC’s hotels burn about $3 million per quarter. But they were closed. Now they are opening up again.

The point is, going forward, the company should not burn much cash. In fact, it has a chance at being cash flow positive, even if there is no rebound in condo and/or lot sales. There are too many variables to be confident in a forecast at this point. But with a cash-rich balance sheet, high quality real estate, a big discount to NAV and lockdowns soon behind us, I think the stock is attractive long-term. So I continue to hold it.

A Useful Idea That Most People Don’t Know About

Author James Clear put this question on Twitter: “What is one idea or concept that you don’t think many people know about, but you find useful or interesting?”

I nominate Alfred Korzybski’s general semantics.

Who and what, you ask?

Korzybski (1879-1950) was born in Poland, fought in WWI, and then moved to the US after the war (after a stint in Canada). As a young man he studied engineering, but his future lay as a hard-working independent scholar in a field of his own making.

Korzybski wrote the seminal text on a new meta-discipline he called “general semantics.” Published in 1933, Science and Sanity: An Introduction to Non-Aristotelian Systems and General Semantics took him 12 years to write. He relied on material from a wide range of disciplines – anthropology, biology, chemistry, epistemology, history, logic, mathematics, neurology, physics, psychiatry, and much more. It is a big, fat, hard-to-read book. Bound in a blue hardcover, students dubbed it “the blue peril.”

Korzybski coined the phrase “the map is not the territory.” And the book, you might say, is an in-depth elaboration and exploration of this idea. In general semantics, maps stand as a metaphor for our ideas, symbols, concepts, definitions, theories, etc. Korzybski stressed that the usefulness of a map was in its similarity to the territory it supposedly mapped. Maps can be “wrong.”

There are many implications: If the map is not the territory, then the map is not all of the territory. In other words, we always leave details out. Whatever we say, think, etc., we leave something out. What we leave out could be important.

Maps are also self-reflexive. Meaning, we can make a map of the map. And we can make a map of the map of the map. Put another way, we can create abstractions based on our abstractions. We can make theories about our theories. We can have concepts built on concepts. Each moves us further away from the world “out there.”

The existence of maps, too, implies the existence of a mapmaker. And that map- maker is a human being with a nervous system that filtered and made sense of the world around him or her. No two nervous systems see the world in exactly the same way. They bring different experiences, different temperaments, different biases, etc.

The idea of maps as explained by Korzybski helps us be conscious of our abstractions and their limitations. We can’t help but make maps and abstract from the world around us. It’s the way we make sense of things. However, we should know when we do it and how it places limits on what we really know.

I find the whole thing fascinating. And I enjoy reading the older texts. General semantics heyday was probably in the 1940s. But that is part of its charm. The ideas have a sort of warm patina to them, like a doorknob to an old wood-paneled library, infused with the sweet smell of pipe smoke from long ago.

Anyway, I like how general semantics challenges basic assumptions about what we think we know. Irving Lee, one of Korzybski’s students, once told a wonderful story involving President Eliot of Harvard, about this idea of being careful about what you assume and what you really know:

Eliot entered a crowded NY restaurant and handed his hat to the doorman. After lunch, he goes to leave.

As he came out he was astonished to see the doorman promptly pick out his hat from the hundreds that were there and hand it to him.

“How did you know that hat was my hat?” Eliot asked.

“I didn’t know it was your hat, sir,” said the doorman.

“Why, then, did you hand it to me?”

And the doorman very courteously replied, “Because, sir, you handed it to me.”

President Eliot was delighted with this precise delimitation of what the doorman saw and what he assumed.

I love that story.

I don’t want to get too much into general semantics here, because this post is already too long and I wrote a whole book about Korzybski and his ideas. See How Do You Know? A Guide to Clear Thinking About Wall Street, Investing & Life.


I’m biased, of course, but this book a good place to start if you’re interested in general semantics (and that attempts to apply it to investing). I also include a bibliographic essay on recommended reading at the end – so you’ll some guidance and plenty more to explore should you decide to go deeper.

My book also won the Hayakawa book prize in 2019, awarded by the Institute of General Semantics, for “the most outstanding work published in the past five years on topics of direct relevance to the discipline of general semantics.” The Institute, of which I am a member, is a great resource. Check out the Learning Center, which includes lots of free stuff. [Link].

Thanks for reading.

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Published May 20, 2020

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