racemize

Is there a way to read this without having a Barron's subscription? Google the title and click on the link from Google. Or I can save it for you.

Also, I am happy to go ahead and say we put too much in banks in 2014 and that was a mistake!

It will be interesting, I guess, to read what Prem will have to say about equity hedges in his 2016 AL. He has always defended equity hedges in his letters so far, for the very same reasons Parsad has written about. I tend to agree with you that in Prem's mind they were not just meant to protect a levered company, but were a call on the stock market too (a macro bet). This being said, I wouldn't call his behavior so far "dishonest": equity hedges have always been very well documented and presented to shareholders, and each one of us could have formed his/her own idea about them. Someone sharing Parsad's view, others sharing yours, others still being somewhere in between (like me). Until a trade is over, you shouldn't really expect a 'mea culpa', should you? Even if a trade performs poorly for a long time. You should know this very well! Now I am sure your fund is having extraordinary results, but for a long time you kept defending your strategy even if it was lagging behind the general market. And I have admired you very much for the strength of will you were showing! Now that the "equity hedges" trade seems to be over, or at least radically changed, I agree it would be great to hear Prem reason about what went wrong and why. Cheers, Gio I think perhaps I'm sounding much more negative than I feel. I think FFH is a good company, and I have been a long time admirer of them. I owned them for 3 of the recent underperforming years and really appreciated the asymmetric nature of several of their macro calls. My issue was and I guess is that there is nothing asymmetric about hedges 100% or greater, and I think it simply cannot be true "protection" as has been implied--no one else requires that protection and they themselves haven't over time. So the dishonesty to me is the label being applied--some amount is protection, but the other amount is clearly a macro call. I just want them to say "this is a macro call and it didn't work out". That's really it. Just honesty about what the strategy actually was/is. Approaching this from a different perspective, I absolutely agree that there is very little difference between being wrong and being early; however, I don't even think they'll ever say that, because they won't call it a bet in the first place!--the narrative is "we did this for protection" not "we made a bet", so there is never any reason to say they were wrong! Even ignoring that issue, I don't think it is intellectually honest to say "I was early, not wrong" if you are 6 years in. Timing does matter, as it reduces the IRR even if it works out. I have the same feeling with Berkowitz and Sears Holding. I think it is almost impossible for the equity hedges and/or Sears to work out with an acceptable IRR for either of them now, so I think the mea culpa may be warranted. We can wait until the trade is fully over though and see what they say, but I have my doubts since in some senses the trade is over as they reduced the hedges by 50% already. With regard to our fund, I view the situation quite differently. Our position has always been on the micro and should be judged on its returns, which is just standard value investor talk. As you know, we had a big position in banks and it got bigger this year during all the macro uncertainty. Our stance was they were cheap and would work out over time, and that may or may not be true. Right now it looks like it was true. In my mind, we didn't call the investment one thing when it was actually another. Moreover, this is also over a 2-3 year period, not 6 years. I feel that if I were in Berkowitz shoes for Sears, for example, which hasn't worked out over a very long period, I would already be saying the initial investment in Sears was clearly a mistake, but that I thought it had the potential for good returns from the present point. Saying all this another way, I think Buffett would be apologizing all over the place. He apologized for investing in airlines when it worked out for him!

I agree--they are much more interesting now than they have been in a while. My problem though is that they do not appear to be honest with shareholders or themselves if they are not able to call this a mistake. And that worries me going forward.

He shows it as one of the lines in the graph, and he did outperform. He just got in the way of his own outperformance...

We used to talk about this guy a lot. I thought I'd check in: https://www.hussmanfunds.com/pdf/annrep16.pdf Underperforming since inception. Look at the chart where his hedging and macro has absolutely murdered him.

8% in my insanely aggressive IRA.

This leveraged argument only makes sense on the surface. If they needed 100% equity hedges to protect the leverage, then they couldn't be 50% now, and they couldn't have taken them off in 2009. So, sure there may be some base hedging that has to happen, but it isn't 100%. A large portion had to be a bet, and they refuse to call it one.

I agree they have, and I certainly have looked into this. Honestly, I'd just rather set my permanent standard of living a little higher. I want to go traveling to different areas and prefer higher-end when I do. I also figure if it is easy to get the money to compound into oblivion, why not? I can see what life is like at those levels, and if it doesn't add much to my quality of life, then that's great. Anyway, I'm going to give all my money away, so maybe that will benefit some other people (hopefully anyway). Also, ultimately this "you can be happy with lower money" concept is Buddhism. And if you are actually a Buddhist, you can be just as happy working as not working. Chop wood, carry water and all that.

Well, taking out 10% a year will kill you. As Jurgis said, something on the order of 3-4%. Of course, when you are making sure you are fine in the bottom 1-5% of outcomes, that means most of your actual outcomes will go exponential. That's why I feel like you either barely make it (or not) or you are incredibly wealthy. And the difference is a pretty thin line, so might as well be on the other side of it. Not taking out 10+%, but long term absolute returns. So with 2M you'll make $200k a year of which a portion is reinvested. I was saying that at that point the vast majority can be reinvested (do you need more than $40k spending money?) so you can stop earlier. Yes, that's right on average, it's just that there are some bad situations where you kill yourself quickly in the beginning--that's why retirement folks run those monte carlo simulations and the 3-4% rule comes out.

Well, taking out 10% a year will kill you. As Jurgis said, something on the order of 3-4%. Of course, when you are making sure you are fine in the bottom 1-5% of outcomes, that means most of your actual outcomes will go exponential. That's why I feel like you either barely make it (or not) or you are incredibly wealthy. And the difference is a pretty thin line, so might as well be on the other side of it.

What's kind of funny is his two conditions for the market to keep growing at high rates actually ended up happening: Anyway, we still have the same two problems now. So another prediction of 6% growth for the next 17 years? Seems reasonable to me.

I imagine most people on the forum are in the $2 million+ category to retire. If you are compounding wealth, it seems a little silly to stop just at the rate that stops compounding (since you spend all the money you earn to stay afloat)--margin of safety would be to get to a point where it compounds at a rate greater than you need, conservatively.

I think measuring a batting rate is a good idea, but wouldn't it make sense to wait until sale? A one year time horizon just seems too short for a value investor to be measuring.

Given CM's comments on GM last year, I think this is likely just a joke.

As someone who entered Aero at the beginning of said death spiral, exited at a gain purely by luck (buying BRK at book value), and then watching it go under, I am very cautious on the whole space. Agreed that the brands are probably the only place I'd be comfortable with.

Ignoring market timing aspects (and who can do that really?), I think the perfect amount of leverage is the amount that doesn't get called. I imagine 20% wouldn't kill you historically, unless you are more volatile than the market is. (e.g., Pabrai with leverage doesn't work very well)

well, it largely depends on tax rates going in and going out. However, you can put more effective money in the Roth if you max it out. So on an apples to apples rate basis, if you can afford the max Roth, it is better.

it was a really great interview.

Yes, although that may have been more like 2003. It's been a while since I read all the letters.

Yes, but that's almost a self-fulfilling prophesy. If you can issue shares above book value, it is always accretive, which makes your BVPS growth look good. Said another way, I wonder how much of FFH's BVPS growth comes from issuing shares at high valuations vs organic growth/investments. E.g., if I recall correctly, they issued shares in the late 90s at 3x book value. Not hard to get BVPS growth doing that. They also used that to make a terrible acquisition (I guess that was in vogue at the time, MKL had one, BRK had one...). Anyway, just rambling a bit.

Well, right, but all it takes are a few sales, and then you go and get the taxes lowered. It is a very straightforward situation in Texas at least. Maybe it doesn't work that way in Detroit though.

Isn't it 42k per building vs 40k for both? So, assessed is 84k, of which 8k is assessed, which is still incredibly high, but less than 10%. So it would seem like it would get halved?

In texas you can go question the assessed value and just show a receipt. Then they lower to the purchased value for you.

Hi all, I've been working on this essay for several months now, and after a grueling editing process, I think it is ready for prime time. Many of you probably recall the extended conversations between Eric and various other board members trying to understand how to calculate Cost of Leverage (particularly when dividends were involved) and the behavior of Cost of Leverage over time. I tried to cover both of those topics in the essay. Thus, the initial part of the essay is how to calculate the Cost of Leverage for loans and calls (with and without dividends, multiple ways), and the second part discusses how the Cost of Leverage changes over time. If you already know how to calculate Cost of Leverage, then you can skip down to the second part, which has pretty graphs. Before starting out, I hadn't realized how strong the curve fit was. Anyway, take a look: https://www.dropbox.com/s/u3epy2qiepi9odr/2016-10-11%20Cost%20of%20Leverage.pdf?dl=0 Incidentally, after staring at and trying to explain Eric's formula for several hours, I realized it could be expressed almost the same as Greenblatt's formula, that many folks already used. In doing so, you can see that Eric's adjustment is actually quite simple (replace strike price with (share price - call price). Anyhow, no one probably cares about that, but I had to pull out some algebra substitutions to make it happen (you know that cool 1/1 can be anything you want trick). Finally, this was posted a long time ago, but I did create a spreadsheet that keeps track of the CoL for almost all the TARP warrants, which can be found here: https://docs.google.com/spreadsheets/d/1NUVie3jKSM64ow9td9-cU-GBFkf5atgeOoTT1aiLtOo/edit?usp=sharing