thepupil

it isn't irrelevant. the owner of index in a given year receives the total return of the index. whereas the seller of short term downside volatility protection receives (premiums received - negative returns of index). there are lots of scenarios where selling downside vol will outperform owning the index. they are two different payoff profiles and GMO states they like one rather than the other. just to be absurd let's say in 2015 the S&P goes down 0.5% every month after divvies and GMO gets paid 0.5% every month to insure downside. GMO ends up flat, the index holder ends up down 5.6%. GMO wins. Of course, one may wish to point out that they both have the same downside risks and GMO has very limited upside (and i'd agree), but they don't see a lot of upside in the index so they don't care. they just want to get paid regularly and quickly (shorten their duration) and accept the "jump risk". I know you know this and understand it better than i ever could.

selling equity vol, over time, has a different return profile than owning stocks, be they of the "high quality" sort or index sort; it's more akin to being long credit or long merger arbs (which they advocate). Also, there probably isn't too much liquidity to sell puts on individual quality stocks in a big way (writing covered calls on the high quality would be equivalent to selling puts on them). They prefer, for better or worse, to be opportunistic sellers of downside vol, rather than business owners, in order to shorten their duration. there just aren't that many months where the S&P just jumps down 20% ( October 1987/2008, the type of month that hurts this strategy, even though that allows for some juicy vol selling thereafter) so they are making a bet that the probability of that type of scenario is lower than the probability of a scenario where equities grind lower or are flat.

unfortunately, there is no free lunch.

spicy dry rubs are really good when done right.

Why not use 3 mo. T-bills or money market rates?

9 month's expenses in I-Bond's 1 month's expenses in the bank For fun/ to satisfy my paranoia streak 1 month in bitcoin 1 month in gold I try to keep my cash completely separate from investments, and use put protected leverage to reduce the opportunity cost of owning a good amount of i-bonds.

are the MTM gains (losses initially) on the big put sales included in operating earnings?

So if he sold he'd have $3.2B of cash. Instead he has $1.7B of cash + $414MM of EBITDA and ~$270MM estimated FCF from Duracell. So that $1.5B of cash foregone by not doing a straight equity sale is yielding quite a lot. <---ya i know that was a bit bass ackwards of a way to put it.

http://www.bloomberg.com/news/2014-11-13/buffett-seen-saving-more-than-1-billion-on-taxes-in-swap.html

Biglari may be a poor candidate for this mental exercise in that value has been distributed to shareholders in the form of deep in the money rights, which have benefited those who have exercised at the expense of those who have not. Per share value gets diluted by the rights offerings, but for those who exercise they are value neutral (if everyone exercises) and value creating (if some shareholders abstain). For the record, I don't own BH, but the share price doesn't tell the whole story.

Your home is down 25% since 2002? If you don't mind answering, where do you live? Detroit or Rust Belt?

I've read the breakdowns of softbank's NAV and find the case compelling but I think yahoo is simpler and activists can have actual influence at yahoo (SoftBank is and always will be the Son show). There are only 4 assets 3/4 are publicly traded or cash. If yahoo core is worth $5 / share then only 9% or so of the pretax NAV is not cash, japan, or BABA. Marissa Mayer has to destroy a $15+ billion valuation gap through tax inefficiency or dumb acquisitions for this to not work out over the long term. I just don't think that's likely. I also just have a bias toward owning US listed stocks, not that that is logical.

And then the Yahoo / BABA / Yahoo Japan Stub that i've been shouting about in the Yahoo thread. However you want to slice and dice it or execute the trade (straight long Yahoo and wear the BABA risk is the simplest, or you can go full arb and short out the BABA and Japan, or you can play with options), Yahoo minus BABA is cheap and it is a very interesting situation.

Nothing too exciting about this trade but it's a special situation with little beta to the market. Long SWY + disaster hedge puts. SWY is trading for $34.36 add in some $28.00 Jan 15 puts for ten or fifteen cents to carry you to the expected deal close in the 4Q or January for all in costs of, call it, $34.50. SWY merger consideration is $32.50 in cash + CVR to receive proceeds of a sale of certain real estate assets and either the proceeds of the sale of SWY's JV interest in a mexican grocer or (if no sale is completed in the next few years) fair value of those assets. SWY management estimates the contingent value right to be worth $3.65. So for $34.50 you can buy $36.15 in estimated value. The CVR will not be liquid or transferable. I choose to buy the puts to quantify my downside in case the merger breaks (although i think the chance of that is very slim). If management's estimate is correct, this is only a 6% upside / 18% downside trade, but with 94% of capital returned to you in cash in less than 3 months, I think creating the CVR at a nice discount to management's value is worth it. Obviously gets more interesting if SWY drifts closer to the cash consideration. Value to Safeway Shareholders Under the merger agreement, Safeway shareholders will receive $32.50 per share in cash. Additionally, shareholders will have the right to receive pro-rata distributions of net proceeds from primarily non-core assets with an estimated value of $3.65 per share. The proceeds are from: (1) The sale of the assets of real-estate development subsidiary Property Development Centers, LLC (“PDC”) comprised of its shopping center portfolio including certain related Safeway stores, and (2) The monetization of its 49% equity interest in Mexico-based food and general merchandise retailer Casa Ley, S.A. de C.V. (“Casa Ley”). If the sales of PDC and/or Casa Ley are completed prior to the closing of the Merger, the net proceeds from these sales will be paid to shareholders at or before the closing of the Merger in a special dividend. If the PDC sale and/or Casa Ley sales are not completed by the closing of the Merger, Safeway shareholders will receive a non-transferable contingent value right (a "CVR"), which will provide shareholders with their pro-rata share of the net proceeds from the PDC and/or Casa Ley sales, as applicable, subject to the terms and conditions of the CVRs. The PDC CVR will have a two-year term. The Casa Ley CVR will have a four-year term. If Safeway is unable to sell Casa Ley before the four-year expiration of the CVR, shareholders would receive a cash distribution equal to the after-tax fair market value of Safeway’s interest in Casa Ley at such time. There can be no assurances that Safeway will be able to sell either or both of PDC or Casa Ley. http://investor.safeway.com/phoenix.zhtml?c=64607&p=irol-newsArticle&ID=1939975&highlight= http://www.cerberuscapital.com/news/safeway_and_albertsons_announce_definitive_merger_agreement

2017 Yahoo Synthetic Call (Long stock, long 35.00 put) 2017 BABA Bear Call Spread (Short 87.5 Call, long 135.00 call) where notional on ATM call is 80% of the Yahoo long position This creates the Non-BABA Yahoo stub with fixed downside on the bearish BABA position. Love me a big steaming pile of basis risk and negatively skewed holdco arbitrage ;D

Winning the Losers Game

I know someone who had their fidelity account breached. The perpetrators were able to change his trading authorizations by calling in and authorizing trading in penny stocks. They then manipulated a worthless penny stock. Fidelity flagged the unusual activity, called him and eventually canceled the trades, but it was a big head ache

3 yrs of 0% return followed by 3 yrs of 20% return for 15 years is 8% CAGR if i did my math right. throw in a 100% return in year 3 just for fun and it's a 13% CAGR. getting to 15% with prolonged periods of 0% is REALLY hard. i understand the whole "shoot for the moon and if you miss you'll land amongst the stars" thing in that you'd be very happy if Fairfax grew by 12% and that would provide a satisfactory return. But in my view, Happiness = Reality - Expectations It is easier to decrease expectations than to change reality, and the 15% CAGR expectation is certainly in need of a big decrease

so let's look at the interim report $3.7B in cash (0 duration, no risk) $3.7B in short term treasuries and other government bonds (0 duration no risk) $10.2B in bonds, about half of which are 5 yrs and in and 40% of which are 10 yrs and out <---so you'd get some big capital appreciation here with rates falling, let's say that $4B is all in 30 yrs with an 18 ish duration, if rates fell 1.5% these would go up by 33 ish% so you'd add a billion and change to book value, not exactly life changing. And the prospective return going forward would be terrible! so in my humble opinion, you want rates to rise to increase the return on the portfolio without moving down into equities or lower quality bonds. this would obviously hurt prices and decrease book on the way there but would be better for increasing ROE and P/B. I understand asset mix is not static and i do not know anything about Fairfax's capital requirements or if all that cash and fixed income is excess capital that can be deployed into higher returning things eventually, but in its current form there is simply no way to earn 6% on the portfolio. I don't know if they have the ability to shift to higher risk things like distressed debt and equities. I assume you do and that's why you have so much confidence, but in my opinion it's tough to bake in your assumptions future distressed opportunities. Anyways, that's all i have to say.

well if that happened, AGG would go up by it's duration of ~5% (X 1.5) + a little bit for convexity since duration increases as bonds fall, let's call it 10 or 12%. So Fairfax would have a massive one-time gain and then the prospective return going forward would be even worse. But you know fairfax and what kind of bonds they hold better than i do so maybe there is more to it than that.

i know this has been discussed ad nauseum but... I've never looked at fairfax in depth but here is the composition of the $24B investment portfolio. Is it not ludicrous to expect 6% returns (much less 9%) from a portfolio that is 70% cash and bonds? And isn't the common stock portion hedged? So you expect Prem to crank out 6% from a portfolio that is 40% bonds (double barclay's agg which yields 2.4%), 30% cash (yields a big fat gooseegg), 16% a market neutral hedge fund (0% expected return assuming no outperformance, obviously he'll likely do much better than 0 but you're starting at 0 when you hedge out all the market risk/reward). it seems unrealistic given the asset mix. 40% bonds 31% cash 16% common stocks 2.6% preferred 6% investment in associates

I'm actually surprised by how low these numbers are even for American Express, but especially for the more common cards. I thought everyone used their card for almost everything the way I do, all their shopping (food, gas, etc), as many of their bills as possible (netlfix, cable, heating oil, electric, LP/NG gas, etc), and everything else they spend money on (discretionary spending, vacations, car maintenance, home maintenance, etc). I would have expected numbers in the ball park of those amounts to be monthly not yearly. aren't the surprisingly low numbers because they are "per card". If you have 5 AmEx's and 5 Visas and spend $20K / year evenly across the cards, would this graph show $2K / card or $10K / credit card company?

^^This I actually doubt it. They are way too big to build a book of hedge fund investments that has a snowball's chance in hell of adding a smidgeon of value. Once you get that big, it's passive investing all day (like Norway does).

the merchants who are patronized by all those big spending charge card holders pay AmEx in the form of swipe fees, inclusion in networks and promotions. I bet AmEx breaks even or is even negative on the Platinum card on the annual fees alone, but the swipe fees more than make up for it. If I pay $450 to AmEx and they give me $600 in benefits a year amex is out $150. But what if I charge $50K to the card / year and AmEx gets 2-2.5% of that, then they are in the black. Plus i bet some people who don't get a lot of benefits out of the card have one for the snob appeal and amex makes money on the fees there.

Charge Cards = "no limit" which really means "we don't tell you the limit, we give you more flexibility, if you are going to put some giant purchase on the card you may want to call us first to make sure we think that is okay". there is a tool online where you can check before a big purchase. Charge Cards are the classic American Express with the centurion logo, high customer service, high annual fees: Green, Gold, Platinum, Centurion Card. You pay in full every month, which is why some believe it has a certain amount of prestige, in addition to the travel benefits and other associated hoopla. Their credit cards are just like any other credit cards and have limits.