JRH

Reminds me of: http://xkcd.com/1132/

I thought about this same issue in other applications of Taleb's "anti-fragility" concept. I think the important part of the concept is to realize that all anti-fragility is "local" - when Taleb talks about a concave distribution of outcomes, it is still convex on the ends. If an atom bomb goes off underneath someone's feet, they don't turn into superman, even though people, as biological organisms, are said to be "anti-fragile". Taleb's "long gamma" options strategy can't work if the financial system is in ruins and the counterparties can't pay. Also, Taleb attempts to refute the argument that the options his strategy employs are overpriced: http://www.fooledbyrandomness.com/Ilmanen.pdf

+1!

I normally abstain from commenting on such things, but I can't help but add my opinion here. This quote sums it up. It is very similar to an argument made in "Bowling for Columbine": http://fromonesurvivortoanother.tumblr.com/post/27657456666/tw-school-shootings-the-day-after-columbine-i

Potential reason to increase buyback threshold: an enormous pile of cash sleeping in Omaha! I won't complain either way.

Potential reason to increase buyback threshold: they've learned that they don't have to actually buy back significant amounts for the threshold to act as a buoy on the stock; if higher threshold results in higher stock price, it makes acquisitions paid for in stock cheaper.

I fully agree with this! By all means, when you find the person that can pick out a small company for which they have justified confidence will maintain a competitive advantage for decades (or several that have a probability-weighted chance of such sustained outperformance), send them my way! ;) Insights like the one that got the attention of this thread are simply the "next best thing" that I, personally, know of.

Your point is well taken, but I see it from a different angle. It's all in the assumptions you make, including Mohnish's confidence and his skill - to ultimately ascertain whether this one company is LIKELY to return 10x or 40x or 2x over ten years. I understand some people really, really like value investing. I find it interesting. But if you tell me how to sit on my hands and earn 40x over ten years, I'm fine never reading another annual report again. I'd rather be traveling! :)

It is easier to imagine a technology company achieving these kinds of returns than an auto company, in any case. The interesting thing is that Fiat actually works as a play on higher future energy prices, too, given their predilection towards smaller cars. But I can't get to 40x return on Fiat without assuming they just miraculously achieve amazing margins, or miraculously achieve enormous market share (helped by shift to smaller cars??).

Just thinking out loud a bit: 10x = ~25% CAGR for 10 years 40x = ~45% CAGR for 10 years The problem with a long horizon is that you don't know the terminal valuation, which prompted, I suspect, Pabrai's wording that he "wouldn't be surprised to see it at [...]". I guess you just have to choose some possible terminal valuations based on whatever limited knowledge you might have. You could break CAGR into ROE and valuation changes - i.e., lower ROE is necessary if you buy at 0.5x book and it reprices to 2x book at the end of the period. Repricing from 0.25 -> 2x book only requires a ROE over 10 years of ~17% to create a 40x return.

Gotta love a no-strikes-called game! ;)

I agree with all your points except your guess, and that's just based on the fact that in the transcript he says he found the company through The Manual of Ideas. I don't have any experience with that source, but in any case I'd be surprised to find out he heard about BYD there and not through BH/Munger/Li Lu. Pabrai loves low-cost resource producers as a form of moat. I haven't tried to run numbers on CHK, but if he believes they have access to a low-cost resource base that could be significantly grown, with a long upward demand ramp (LNG, anyone?) at high IRRs, then who knows what kind of estimates you could get to?

I do not think 10x optimistically rules out BAC over ten years, but you are right that 40x would seem to discredit the idea. Looks like I should bring myself back up-to-speed on CHK.

"I would say that this particular business, I would just say, it's just a confluence of factors, it's an unbelievable manager in a very misunderstood industry with just a wide disparity on valuations and a lot of tailwinds that are very positive. It would not surprise me if we held this for ten years that we might have somewhere between a 10x and 40x return on it." Safe to say it's in the Pabrai Fund's portfolio - although in the above context he was referring to a huge position in the Dakshana Foundation portfolio. It wouldn't have to be in the filings if it were a foreign company. Thoughts? I'm assuming lots of people here would love for it to be Bank of America, and in fact, that'd be my guess if I had to make one.

Fairholme Capital 13-F filed: http://www.sec.gov/Archives/edgar/data/1056831/000105683112000004/submission111412.txt GM and Lincoln National are added to the list of companies they are holding warrants on...

The idea of a "reserve currency" is more complex than the mental model most people have, which is that it is essentially "voted" on by people/institutions/nations, in one form or another. Not accusing you of this, just saying in general, it's what a lot of people use as a "proxy" concept. One example of the reality is the fact that China's holding of U.S. financial assets (reserves, T-bills, T-bonds), is a necessity in order to maintain their currency peg. Eliminating those asset holdings would damage their export sector, as Hugh Hendry has pointed out. They are not "doing us a favor" by buying those assets. They are in the equilibrium they have chosen to be in for their own interests. So, two distinctions I would make. First, I would suggest that a better question is, "At what rate does the rest of the world wish to accumulate U.S. financial assets, and for what reasons?" Second, I would focus on broader measures of the money supply. If we were running $1T/year deficits while expanding private sector credit, I would be pretty concerned, too, but that is because I expect the combination would cause demand-pull inflation. Just to clarify, do you believe that being dropped as reserve currency would cause inflation, or vice versa? Just some thoughts.

Well, here's one opinion on the subject: http://globaleconomicanalysis.blogspot.com/2012/11/prepare-for-demise-of-california.html I actually don't disagree with the direction of results he expects from this, just the severity.

Sun, I honestly don't know; I'm not knowledgeable on managing the risks involved in shorting/options, so I simply don't do it. I was really talking out loud to even suggest the approach, as it's based on my incomplete assessment of the factors. Here's what I think I know about HIG, though: - I think HIG is likely undervalued, though I have a wide confidence interval on that because of the insurance industry and management. - I agree with Plan that HIG's management has at least been doing as they said they would, which is promising but isn't enough to make me really comfortable with them yet. Because of that alone, I wouldn't make it a big position. - I think the warrants are underpriced relative to the common, and generally have been for some time. - My guess is that it is very likely that stock price meets book value somewhere in between the two sometime in the future (let's say, within the life of the warrants). Smaller chances that the outcome is either better (stock price goes to/above book) or worse (book collapses to current stock price or they never meet). By those estimates, the warrants look better to me than the common on a risk-adjusted basis. - Because of the low strike price, it's not swinging for the fences quite like with the AIG or BAC warrants. Obviously there are pluses and minuses to that. - Current stock and warrant prices make me assume that the market thinks HIG is bound to tread a lot of water in the coming years. I'd assume that means there is a mistrust of book or a mistrust of management (or both). Lots of speculation! For the record, I trust Plan's take on the dynamics of the insurance business more than my own, so judge accordingly! - John

If I ever got into arbitrage with shorting or options, long HIG warrants offset by common would be near the top of my list. Every time I compare my estimates for HIG warrant risk/reward against BAC and AIG, it's always a miss (sometimes a near-miss) for HIG. Maybe we'll get lucky and the board favorites will shoot to the moon before HIG makes a move! (a guy can hope!)

One of my very favorite market irrationalities is hearing investors and analysts say a stock is a "long-term buy but a short term sell". My experience suggests they are so consistently wrong about getting a better "entry price" later that you could just about build a quant model off it!

Bass should write his own equivalent to Dalio's "How the Economic Machine Works". In the context of other economic theories, he is always a little vague about the theory behind his macro calls (currency, inflation, etc...). What I have to assume he is suggesting is that the central banks swapping debt instruments for reserve balances (some call this "money printing", which is problematic not because it's incorrect but because people disagree about what that term really means and they don't realize they are arguing over terminology more than theory) are offsetting the reduction in deposits that accompany private-sector de-leveraging. You might call that a sort of modified-money-multiplier theory where you're just changing what "money" you're counting and you assume that overall monetary velocity is always going to be more or less the same. In my opinion, that is an unsatisfactory simplification (not because I know better but because I think all attempts to predict monetary velocity outside of specific circumstances are a result of being in love with models).

Totally agree!

I think she has provided some of the most candid, insightful commentary on the bank bailout process. http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exit-interview.html?_r=0 I'm invested heavily in BAC but that doesn't mean I think the right things happened in 2008. Maybe I am naive but I believe all the banks should have simply been exposed to the same FDIC receivership process as banks always are - protecting counterparties and depositors and imposing losses on shareholders and bondholders.

52% equities - 17% - Europe mutual fund (401k) - 17% - AIG/BAC warrants - 18% - other equities (more financials including the aforementioned) 23% personal loan (secured, good interest rate) 13% income-producing real estate 12% cash I would love to get cash up towards 20%, but what to sell? Just trimming off least-favorite equity exposure lately - even that is hard.

Everything I've seen (and you can only conclude so much from data if you can't literally observe the channels through which A affects B) says that QE 1 and 2 resulted in increased interest rates - despite the fact that partial equilibrium analysis says increased demand (Fed purchases) -> higher price -> lower yield. The general equilibrium appears to be that since assets compete, and people believe QE will help the economy, that people dump low-yielding and safe securities for higher yielding, more speculative securities. In fact, the Fed openly admit to targeting this transmission channel in attempting to apply the "wealth effect". There are lots of marginal effects, but I think we sort of miss the forest for the trees if we don't consider the most important question to be - will it materially improve the economy? If it does, then it should benefit BAC despite whatever marginal effects it could conceivably have on NIM, deposit base, etc... in the short term.