hyten1

i have also recently switch majority of bulbs to LED (the ones that rarely gets used, i left it as the old bulb) beerbaron, would like to hear about which bulbs is best to buy so that it actually last for 20,000 hrs. you mention philips brand? is it all philips? or does it have to be philips and energeystar? or would any energystar do? i guess its a little too late, i have already spend a few hundred dollars on the led bulbs hopeing they will last for 20k hrs. but who knows. thanks hy

agree! that is why i am always looking for "situations", "opportunities", not net-net or, low PE or great companies with moat i look for "situation/opportunity" that provide me the best risk reward adjusted return base on what i know (that might be a net-net or a company buffett invest or a company i read about on this board etc.) hy

yes that is right, it seem like you are trying to answer a different question? i put your equation into a spreadsheet, using different dividend amounts along with current prices (stock, warrant, strike etc.) i can determine at what point (how much dividend would it take) to make the common a better investment vs the warrant. as for the cost of leverage question. it doesnt seem obvious (at least to me) how you extract the cost of leverage number out from these equations/exercise. some findings: - $0 dividend warrant is better - $1-$2 dividend warrant is better if common is approx $45 or higher - etc. so i guess everyone can take an educated guess as to how much dividend will be paid out from now until 2019 and determine what you think the stock will trade at which will then allow you to determine if common or warrant is a better way to go. hy

racemize, sorry a quick question why "I determine the common price at which the total return of the common matches the total return of the warrant"? sorry for my dense brain. if i use dividend of $0 for all 22 quarters using your formula i get a price of $41.61. so this is telling me if no dividend the warrant and common will have the same return if stock is at approx $41 (which is close to where that stock is trading at right now). what does it mean if the actual stock is lower or higher than $41.61? hy

looks about right, now the question is what should one do if you own a great deal amount of the B warrant (in the event dividend starts or before in preparation) :) Would you mind posting a cost of leverage example with the dividend after you have thought about it? (Perhaps you already have). txlaw and I have come up with different costs for various dividend scenarios and are working that out at the moment. I'm curious to see if it matches the total return formula I derived earlier in the thread. I would think they would match or at least that they will be fairly similar. Let me see if I can sort of describe the way that I'm calculating cost of leverage for these GM warrants, which is to treat a warrant buy as a leveraged buy of the common, where the principal balance is completely forgiven in case of wipe out. Constructive criticism welcome. Strike price = $18.33 = Loan principal amount Common price = $40.27 = Economic rights bought today (minus div collection) Option price = $22.62 = Cash outlay today Intrinsic value = $21.94 = Cash outlay attributable as down payment Time premium = $ 0.68 = Cash outlay attributable as pre-paid interest for 5.5 year loan Div (possible) ~ $ 1.20 = Additional interest sweeped by the market on an annual basis The strike price is like the principal amount for a balloon payment loan. In 5.5 years or so, I can take full ownership of a share of GM common by making a cash outlay equal to the principal amount. The differential between the strike price and the common price today -- the intrinsic value of the option -- is equivalent to the cash down payment required for this non-recourse loan transaction. I have to outlay $21.94 today as down payment to get this leveraged deal. Additionally, I have to pay pre-paid interest (the time premium) of $0.68 today. In order to get the nominal interest rate associated with the pre-paid interest, I have to solve for a rate that generates annual coupon payments with an NPV equal to the total amount of the pre-paid interest. For simplicity's sake, let's say that comes out to 1% based on the discount rate I use. And that rate, btw, should be keyed off the loan principal amount, aka the strike price. BUT, additionally, the dividends that go along with my common ownership rights are swept away by the market, unlike if I simply use portfolio margin to buy the common. If the dividend starts next year at $1.20 (~3% yield), that's a $1.20 annual cost that must be assigned to the loan principal amount, aka the strike price. So I would get an additional interest rate of $1.2/$18.33, which equals approximately 6.5%. So my total cost of non-recourse leverage for $18.33 worth of borrowing (an LTV of 46%) is 6.5% + 1% = 7.5%. If the dividend ratchets up over five years, then my interest rate goes up. Of course, this does not take into account the "risk free" rate I could obtain for 5.5 years with that $18.33 worth of cash that I didn't have to outlay today, which somewhat mitigates the (potential) high interest rate. Bottom line is that the cost of leverage depends on the dividends that GM decides to go with over the next couple of years, as there is no dividend protection.

good discussion, bmichaud i too took a while to understand this stuff, ever since eric first wrote about it in the bac leverage thread i have been contemplating what to do with the GM B warrant since it seems likely that GM will initiated a dividend in the future. i am still trying to figure it out. modifying your example (good example) to use numbers closer to real thing. GM stock price $40.7 GM divy $1.08 GM B warrant price $22.88 Strike $18.33 40.7 stock price - 22.88 B warrant price = 17.82 leverage Assuming no dividend: 17.82 leverage x (1+x) = 18.33 strike. X = 2.85%. With dividend, the $1.08 gets added to the strike: 17.82 leverage x (1+x) = (18.33 + 1.08) = 19.41 adj strike. X =8.45%. its good that we solve for X but what is really X? for me it took my dense brain a while to come around to the idea of "leverage" not sure why that word confused me a great deal. instead if i use "hurdle rate to breakeven" it makes more sense to me. EDIT: however the above example is for 1 year. since B warrant doesn't expire until 2019 which is approx 6 year away. here is my attempt to do that calculation Assuming no dividend: 17.82 leverage (1+x)^6 = 18.33 strike. X = 0.5%. With dividend, the $1.08 gets added to the strike each year (making it simple): 17.82 leverage x (1+x)^6 = (18.33 + 1.08 + 1.08 + 1.08 + 1.08+1.08+1.08) = 24.81 adj strike. X = 5.7%. hmmm, thinking outload here, did i do this right? why is X lower when its for 6 year vs the 1 year? 5.7% doesn't seem like such a large cost. hyy

combination of both i can easily transfer to the necessary brokerage account when need be, it only takes 2 to 3 days to appear. i also have cash in the actual brokerage account. earning 0.9% is not much would like to hear what others are doing. hy Is this cash that you are never going to invest? Or would you buy something tomorrow if you found. I leave my cash in the brokerage account earning 0 just in case a stock I like crashes and I need to quickly buy

i have a few of those online savings accounts like capital one 360, ge capital direct, barclays direct, etc., i get from 0.75 to 0.9% not a lot but better than 0%

they should expand the study, figure out what each investments contribution is to WEB's success hy

#32, #41 are very interesting

what do you mean by "..tearing it up?"

yes, i guess i was just curious. it would be interesting if top 5 or handful of investments contribute majority of WEB's success.

just out of curiosity, i was wondering if anyone has ever encounter any sort of study or breakdown of the percentage contribution to BRK and/or WEB networth is? meanings out of 50bil of networth (estimate) maybe KO's gain contributed to 10% of it, GEICO's gain maybe 5% of that etc.? just curious hy

i just started to read http://ecx.images-amazon.com/images/I/51YYWfJWjKL._SY344_PJlook-inside-v2,TopRight,1,0_SH20_BO1,204,203,200_.jpg

nice read, LC nice find, i thought this was interesting: Miguel: Do you think there is particular reason for his focus on consumer and financial companies? Alice: Yes. With financial companies you have leverage that can be controlled, “regulatory oligopoly,” and trust. Insurance float is only one example of leverage. The spread on “float” in banking can be controlled too, if you lend intelligently. Banking is a nice little business for the few who are willing to do it in a vanilla manner. “Regulatory oligopoly” is the entrenched competitive position that’s, in effect, provided by your regulator and its rules. It can give you quite a few, or few hundred, extra basis points of return. I think Buffett’s consumer plays have been overrated as a theme. He likes good companies with enduring business models. Many happen to have been consumer companies. He got intrigued by the idea that a brand could be a very enduring asset. Then he was surprised at how quickly the value of brands eroded in the 1990’s. Brands with true “moats” are exceedingly rare. Of course he wants one when he can get it, but these companies usually also are expensive. .... If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it. .... Lastly, investing is not a religion. It’s not like you have to follow a creed. Warren will buy things that are simply cheap. He’s pragmatic. There’s no rule that he has to be absolutely consistent. If he sees something that he thinks is undervalued he’ll occasionally buy it, even if it’s a Korean dairy company. Then he’ll sell it. Everything doesn’t have to fit into a perfect framework.

well it depends on how you define as "good capital allocation". obviously entertainment/social/arts aspect of society are important. people need to unwind/relax etc. i don't know if WEB really think art is a waste of time, i personally don't think he does. also web's every word is etch in stone for all to see/dissect. we all know people change, words and be twisted and sometimes you just need to explain yourself better (imagine everything we say is etch in stone and you don't get to explain yourself or are able to have a dynamic dialog about the topic). i think the art example WEB use is just an example. then again its possible that WEB think art is a waste of time. hy

eric, i hear ya, i don't like/agree will the screw up tax code either. (the selfish person in me says I want they say setup as buffett) at the end of the day by in large everyone is selfish (even buffett), there are degrees of course. (you can argue donating 50bil is selfish). the truly generous is someone who's lively hood is in doubt and yet decide to donate what little they have (i guess you can argue that is stupidity or generosity) i don't think money will turn an artist into the next great scientist. but money will allow the great scientist to do many things that he/she wasn't able to without the cash. sure capitalism is a great capital/resource allocator, but not always.

if burning 50bil wiil have such a positive impact, why don't we just burn all the money. we should call up all the foundations/research center of the world and tell them "lets burn all your money, whatever you are working on or problem you are trying to solve will take care of itself, since money doesn't buy you time, or resource or equipment or talent or influence etc.". man bill gates sure is wasting his time, i know there are people who think he is (he should spend his time in biz since he was so good at it) i guess i am a little confused by what some of you are saying? i guess you guys are saying capitalism will take care of itself, greed and self interest will allocate resources we don't need bill gates or someone like him to do it? we all know capitalism solved many of the worlds problem, "but not all". Actually, if you burn the 50 bil it will make the remaining capital more valuable. Thus, no destruction of value.

i think some of you are missing the point sure there are many people who will do what they do no matter how much or little they will get paid. (but there are some that will be swayed by money, its not because they are greedy, sometimes its necessity of life) are you guys really saying capital/resource allocation is of no importance? why don't we just burn the 50bil or whatever and call it a day? hy

gio what made you think Price / Sales and Market Cap / GDP have predicted quite reliably subsequent market returns for the last 50 years (1948-2003)? honestly 50 years is not that long anyways. i think that is peoples point, that is your assumption. "There are many value screens that work great when backtesting against data, as Hussmann is doing -- but they aren't necessarily predictive. " ericopoly hy EDIT: brooklyninvestor's post on this topic http://brooklyninvestor.blogspot.com/2013/05/corporate-profits-to-gdp-why-doesnt.html is a good read. he also show what if you had follow the cap / gdp ratio (meaning you know in hindsight what was going to happen) what your results would of been, actually no very good. Eric, I didn’t want to “propagate any false dilemma”… ;D ;D ;D I simply don't care, believe me! ;) I have already said what I mean by “this time is different”: if Price / Sales and Market Cap / GDP have predicted quite reliably subsequent market returns for the last 50 years (1948-2003), and now they suddenly cease to, well, that’s what I mean by “this time is different”. And I am perfectly aware my meaning of “this time is different” is not what usually that expression is used for… Otherwise, if they haven’t predicted subsequent market returns reliably, then I would be very interested if someone might give me good evidence of the fact that Mr. Hussman has “massaged” the data. That’s all! :) Gio

this post sums it up for me http://brooklyninvestor.blogspot.com/2013/05/corporate-profits-to-gdp-why-doesnt.html thanks brooklyninvestor

i think the huge supply of cheap/plentiful labor on the world stage cannot be ignore (china, india, southeast asia etc.). it is a major contributor to the stagnate wage in the US and a positive to corporate profit. can this massive shift create a "this time is different" even if its for a short while? decades vs centuries?

giofranchi, regarding the chart on page 5, sorry for my novice questions: - i assume the GDP and profit are for US companies? - i assume profit from overseas are included? - i have never see anyone answer this. since companies are more global know how do you take into account the profit from oversea along with GDP's from other countries? I don't know how all these work out to. Even munger/buffett mention the profit/gdp ratio is not as useful as its use to be - the idea of reversion to the mean (isn't this why hussman is concern). what if this time is different (i know i know the this time is different talk, i am just raising it, because it is a possibility no matter how low), considering the HUGE increase in labor supply from the world (which reduce cost and increase profit etc.) i honestly don't know the answer, i just keep looking for undervalue situations. hy

one thing about reversion to the mean i always wonder. how and when do you know the mean have change. i understand people bash "this time is different", but it is a mean after all, and they can theoretically change. seems like you will only know it after the fact, which isn't very useful. an example, average height of humans have change over time etc. just a thought :)

nice, i share your sentiments. i am trying to build a position, now it just makes it harder. i honestly am not sure if brk won't take it out even at a higher price. they have bought it at a higher price. (assming brk wants to take it out) hy We lucked out on this development. Put our spare cash into it a couple of weeks ago, adding to our large position, after Weschler bought a significant amount for his children, and we actually went into margin in anticipation of receiving the LRE dividend next month, something we almost never do. It's now our second largest holding. I've got mixed feelings about the bump up in price, though. The lower the price, the more likely a BRK take out. In a way, I'm a little disappointed because DaVita will likely now keep pace with the market leaders, making a takeout increasingly unlikely as the gap between IV and MV narrows.