constructive

Sure, it's pretty easy to construct a bad portfolio. You can just buy worthless shell companies like Speedsport Branding (SDSP), Stratus Media (SMDI), Insynergy (ISYG), Copytele (COPY), 22nd Century Group (XXII), Virtual Piggy (VPIG), etc. Of course, the underperformance of the long portfolio doesn't guarantee the outperformance of the inverse short portfolio.

This is pretty cool, thanks! So the average return is 29.8% and median return is 15.8%. What would those numbers be annualized, versus the market? I wonder how this will compare with the subset selected for the CoBaF Fund: https://docs.google.com/spreadsheet/ccc?key=0AivVdWOTQE2JdGQzYkFSQUg2eUR3UVRTcThFYWpBelE#gid=21

Do you ever calculate the earnings, book value or other metrics for your holdings on a look-through basis? What are they now? I did a rough calculation that my look through metrics are around 13x trailing earnings and 1.7x tangible book. This compares to approximately 16x trailing earnings and 1.3x tangible book for the CoBaF Fund, and higher numbers for the market. So I'm more earnings oriented and slightly less asset oriented. Note, you should not be averaging the P/Es. Instead, average the yields (the inverse), and weight them by the size of position if desired. Then that can be converted back to P/E.

To go from excellent (over 5% underwriting profit across the cycle) to average (5% underwriting loss across the cycle), for a large company like GEICO, I'd say 50 years. It's a punctuated equilibrium - the most dangerous points are when key people retire. For a small company like Lancashire which is more dependent on key people I'd say 25 years. What do you think?

"Our main business is managing proprietary capital, but private equity firms increasingly approach us to use our technology to find companies to acquire." Harry has a vivid imagination.

I've bought shares of LUK, DTV and MIL in the past week and will probably buy more of those in the next week. COBAF has almost persuaded me to buy FTP.TO. It would be my first idea sourced from here.

I come up with $89.2M for the other calculation: $1B * 1.05 ^ 50 - $1B = $89.2M * 1.1 ^ 50 Close enough to $87.2M.

I assume the $1B float must be invested at 5%, but I can reinvest my equity in excess of that as I please. LC makes the opposite assumption. So the float produces $50M risk free per year, and I require a 10% return. I will pay $500M.

Think of it this way: you just paid $1.5B to acquire assets worth exactly $1B and liabilities worth approximately $0. Your equity isn't small and your leverage isn't free in this scenario.

1. 999,999,999.99 - arbitrage 2. 999,925,000 ish - proceeds minus PV of $1b liability plus profit (theoretically should be 1 cent profit for arbitrage). I guess stealing the money from the widows and orphans who own the float is a Madoffian form of arbitrage. Ditto on these numbers. (Sorry, I misinterpreted your arbitrage comment. :-[) The reason you shouldn't pay more than $1B is that you should be able to earn the same return on your own money as on someone else's money. Therefore if you pay $1.5B you are giving up earning $150M risk free in order to earn $100M risk free.

1. 999,999,999.99 - arbitrage 2. 999,925,000 ish - proceeds minus PV of $1b liability plus profit (theoretically should be 1 cent profit for arbitrage). I guess stealing the money from the widows and orphans who own the float is a Madoffian form of arbitrage.

If the risk free rate is 10%, inflation is running pretty high. Or is that 10% real? I don't believe the real risk free rate is ever likely be 10%. I also have my doubts about the existence of "risk free".

Yes, that would be my expectation. But that study actually seems to indicate the opposite: average investment returns for people with IQs lower than 100 are not lower than people with IQs of 100. It's only above 100 where IQ has an impact on investing performance. That study doesn't break down the top quantile, but there is a much larger jump between the 8th and 9th quantile than between the others. I think it suggests that people with 130, 140, 150+ IQs are substantially dragging up the average returns within that quantile. If there is leveling off above a threshold, it's probably above 120.

Consider Buffett's famous comments on IQ: "If you are in the investment business and have an IQ of 150, sell 30." "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." It's an appealing story, but is it accurate? http://www.wu.ac.at/executiveeducation/other/vgsf/activities/seminar/2011-05-27-grinblatt_smartinveseurope0511.pdf Translated into IQ scores, it looks like Finnish investors with an IQ above 120 outperformed those with an IQ of 100 by roughly 2.2% annually. Somewhat perversely, I think quantitative aptitude might be underrated in investing. (Of course emotional control, social and qualitative thinking are also critically important.)

Can you track one of their former bankers down on LinkedIn?

Awesome. I like the setup. Here are some stocks that might make the ballot next time: FNMAS (or other Fannie / Freddie preferred) TPRE (or TPOU.L) GS GNW LUKOY DJCO MIL

Mephistopheles, I think there is not that much demand for the Pabrai approach. How many money managers besides him emphasize cloning other people's ideas? For better or worse, one of the main things investors respond to is confidence. If you don't have a comfort level (yet) with your own analysis they will sense that.

I think the fact that over 100 people voted in a single day, and expressed strong consensus of 20+ votes on some of the top picks, suggests that the voting format in this post will probably work. Not perfect, but good enough and extremely easy to use. Although I'm not the biggest fan of SHLD, BAC and cash, I think it would make sense to introduce some weighting. Maybe a 15 stock portfolio with full positions for the top 5, three quarters positions for the next 5, and half positions for the next 5.

I compared the list to my holdings, and picked my 5 largest holdings. (Actually, I only own 4 stocks on the list so added JPM from my watchlist.) I assume others do something similar.

I like 5 picks per person. I suspect top 2 picks would result in more polarizing, risky bets whereas top 5 picks builds more of a consensus.

I already made my 5 picks (AAPL, DTV, INTC, JPM, LUK) but here's a write-in suggestion: Short CRM.

TPRE is IPOing tomorrow, priced at $13.50, 1.1x tangible book. http://seekingalpha.com/article/1636512-ipo-preview-third-point-reinsurance http://www.thirdpointre.bm http://www.sec.gov/Archives/edgar/data/1576018/000119312513318106/d532633ds1a.htm Total investments 937,868 (Third Point is the exclusive manager) Total assets 1,606,495 Total liabilities 581,634 Shareholders’ equity attributable to shareholders 972,665 Book value per share 12.40 Diluted book value per share 12.07

I don't know, saw it second hand. AmorePacific seems like a good guess.

What are you interested in? Li Lu has been pitching Korean preferred shares, in particular Samsung, Hyundai and A-1 Pacific: http://blogs.cfainstitute.org/insideinvesting/2013/05/14/light-and-heat-at-the-ira-sohn-conference/ https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CC0QFjAA&url=http%3A%2F%2Fwww.ksri.org%2Fcommon%2Fdownloadw.asp%3Ffid%3D4535%26fgu%3D002001%26fty%3D004003&ei=HR4IUsP6MoGwyQH8lYD4Dw&usg=AFQjCNH0rp-zyr6YLYHT_8J1DlwNfGhA_A&sig2=8XqBMcjOl6MWRt-ksyX1RA&bvm=bv.50500085,d.aWc Hyundai Marine and Fire and Hanwha Insurance are also on my watchlist. I hadn't noticed that IB only offered Korean futures, not stocks.

I think your best bet is Etrade Korea. Foreigners can open accounts, and they offer access to Korea, Japan, Hong Kong and the US.