onyx1

I can't stop laughing!! Of course, it shouldn't come as a surprise, since Harry Long self-declared himself a GOD years ago: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/the-10-commandments-of-insurance-investing/msg46138/#msg46138 I'm overwhelmed with gratitude! What unbridled generosity that such an immortal would bless this earth with his ground breaking mathematical discovery that will compound at 30% annually with zero correlation to the S&P!! Forget that silly old saying that starts with "If it looks too good to be true...", thats just old school, we are in the modern era and have high speed computers. It's different this time! :o

Gio, that is quite a compelling recommendation! Thank you, I had never heard of Kay until now. Just ordered "River of Stars", and look forward to delivery.

Interesting. Would you mind linking to the printer and coil binding machine you purchased? Thanks! Printer: http://www.shopping.hp.com/en_US/home-office/-/products/Printers/HP-LaserJet/CC494A?HP-Color-LaserJet-Enterprise-CP4525dn-Printer#BVRRWidgetID Binders: https://www.probinding.com/SubCategoryProducts.aspx?SubCategoryID=2 If you are planning on binding your documents, automatic two-sided printing (included in the printer linked above) is a must. Also, if you are planning to bind one or a few documents a day then the low volume (read: least expensive) binder will do the work. No need to pay for an expensive binding machine that is designed to bind 50 presentations in a sitting. Enjoy.

I forget where I got this, but no matter, enjoy! Bruce Berkowitz on investment process… 9/30/2009 Ignore the crowd Owner earnings computed in as many ways as possible SEC reports, conference calls, investor presentations Focus on every business element that requires judgement Review every element of accounting that may not reflect reality Including insurance claims, bad debt, lawsuits, healthcare liabilities, pension obligations, and the government Look for hidden expenses Management is guilty until proven innocent Compare reported earning to free cash and ask why they are different Look for inconsistencies between BS, CF, and Income statements Look at landscape business is operating Recognize headwinds in economic, demographic, technological, political, or competition Is business growing? Assess the entire capital structure of enity Look at leverage, ROA vs ROE, tangible equity Off balance sheet items Can business work without leverage, nad how much do they depend on lenders Examine goodwill Review customers, suppliers, competition, substitutes, industry concentrations of power Regulators, taxing authorities, creditors, retirees, unions. How powerful are employees? Study management How compensated Do they under promise and over deliver? Are they true owners vs option holders? Allow a level playing field with the owners? How good is paper trail of key executives? Deep understanding of business? How have they allocated capital over time? Cant make good investments with bad people Review old transcripts and see how they compare to results todays Consider worst case and illogical extremes Are there too many variables to examine, monitor, or estimate? What are correlations with other investments? How can this investment blow up? Review price Margin of safety Allows for bad luck, stress? Can we achieve double didgit, growing, FCF yield without risking principal? Playing russian roulette Picking up pennies in front of steamroller? Bruce Berkowitz's Basic Checklist For Investing 1. Can you kill the investment? Is there adult supervision at the company? 2. Is the company essential? Does it depend upon the kindness of strangers? 3. What can the company make? Reasonable profitability for owners? 4. How are owners paid? Distributions? 5. Management - honest in past and present? 6. Does accounting reflect reality? 7. Does the balance sheet match up with the income statement? 8. Catalysts - Buybacks? Misunderstood? Is enterprise having a big problem that is fixable? Everyone's been burned by the stock so afraid to buy it. 9. Are there irrational fears of current headwinds? 10. Does the business have pricing power or unit growth? 11. Can you hold the investment for a long time & does it improve portfolio performance? On Financials: He's "all in" on financials now. American International Group (AIG). CIT Group (CIT): misunderstood. Bank of American (BAC): misunderstood. Fixable problems. Likes holding companies like Berkshire Hathaway (BRK.A / BRK.B) or Sears Holdings (SHLD). No interest in Europe, plenty to do in the US. On Sears (SHLD): "I'm happy for people to push down the price." You have to understand the history of anchors in malls in the US to appreciate Sears and Kmart. Top Ten Lessons Berkowitz Wishes He Learned Long Ago: 1. You always have to have cash, especially when no one else has it. (John Burbank of Passport Capital has said the same: "Cash is most valuable when others don't have it.") 2. No free lunch- it’s not free, or it’s not lunch. 3. You can’t change people! You can change yourself, but not others. 4. You only see reality under extreme stress- you want to get to know someone, you need to see them under extreme stress. (MF note: Completely baseless guess, but does anyone else think he's possibly referencing the situation where Fernandez left FairholmeCap here?) 5. Volatility is not risk! 6. Always assume you will have bad luck. 7. Few variables to win. Once you have to think about more than 3 variables, your odds of winning are low. 8. If you have to use more than 6th grade math, you’re in trouble.

I prefer paper as well. Reading is easier with a hard copy, plus I can add written notes, then file and quickly retrieve documents weeks/months later. No electronic device comes close. A few months ago I bought an HP high-speed (42ppm) duplex color printer and a coil binding machine. I couldn't be happier with the results. It has worked flawlessly, and documents are ready within minutes. Best of all, I don't hesitate to print 10-K's, 10-Q's, presentations, conference calls, transcripts, and articles that interest me. My daily reading pile is ready in minutes. I now read more information with better comprehension that ever before. This alone will pay for the $2,000 all-in cost of the hardware many times over.

Eric, even with your quickly growing assets most brokers will consider you a retail customer. And with retail, the suitability risk (even with a QIB letter) for any derivative trade is considered large as brokers are made parties to claims all the time. Using the "widows and orphans" defense the retail customers frequently win when in front of an arbitrator. You need to have a very good relationship with a broker (I believe Twacowcfa falls into this category and often executes non-recourse derivative trades), or you need to have a prime broker who will guarantee trades on your behalf and give you access to a variety of financing, credit, securities, and derivatives offerings unavailable to retail.

The security's claim still has standing. If the sweep amendment was illegal, it still is. It doesn't matter who now owns the security, but rather that the security itself was wronged. Caution: I am not a lawyer. I know nothing about law so the above could be complete BS. I did take the LSAT though. I hate logic games. If Fairholme doesn't have standing because of post-third amendment purchase timing, it's safe to assume that WR Berkley & Co. won't have the same problem since they bought before conservatorship.

Fairholme complaint attached. Notably, W.R. Berkley is a party to the lawsuit as they held a significant position of FMCC Series S and FNMA Series O prior to conservatorship declaration. Fairholme_WR_Berkley_vs_USA.pdf

IV estimates can and do change. Unless you are all knowing about the future, you have only estimates (guesses). Surely this we can agree on. How have you witnessed the movement of IV itself? You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value. Going back to the coin flipping example ($1 if we win, $0 if we lose). To buy this asset (ability to participate) we would pay no more than $0.50. If it turns out that we win, we now have a $1 asset. Had we paid $0.75 before the toss, we cannot claim this was a good decision on the basis of being less than the ex-post $1 "intrinsic value" (instead of $0.50 or less). So in my view the intrinsic value changed from $0.50 before the toss to $1 after the toss. I agree with racemize. I think folks are saying the same thing, just some are looking through the rear view mirror, others the windshield. Looks like this is where valuation meets quantum physics. Interesting discussion but hard to see the practical relevence. For those interested in these issues here is a classic book that explains, in simple english, some mind-blowing phenomena of the world we live in. http://www.amazon.com/The-Dancing-Wu-Masters-Illustrated/dp/0681189657/ref=tmm_hrd_title_0

Complaint attached Perry_vs_Lew_13-cv-01025.pdf

Maybe beer, but (at least with the people I know) Coke and cigarettes seem to be a necessity for an ever shrinking percentage of the population. I suspect in 20 or 30 years saying Coca-Cola will be like saying "Tang" or "Ovaltine" today. It may bring back a feeling of nostalgia, but it will not be on anyone's list of things people spend their last nickel on. Coffee might be another one, but it is a highly fragmented market, and the big players do not have even close to the best coffee, in fact you can make much better coffee yourself at home. That leaves beer I guess. I shouldn't have sold my SAM stock. Beer is a "necessity" for sure, but it doesn't have anywhere near the brand loyalty as Coke. At Mexican restaurant, I will order a Tecate, or if eating Chinese I won't hesitate to ask for a Tsingtao even though my "goto" beer is Budweiser. Will I do the same for a Chinese or Mexican cola? Not a chance!! :o I'm certain that this dynamic holds true for the general population.

Enjoyed the video thanks for posting. A great example of clear thinking. Price makes a complicated process seem simple.

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, Michael J. Mauboussin http://www.amazon.com/books/dp/1422184234#_ Saw this on top of Buffetts' desk while he was giving an interview to a reporter.

Fairholme releases statement, says they own $2.4bln par amount of GSE preferred. http://www.fairholmefunds.com/show_ie_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/Fannie-and-Freddie-v6_0.pdf

http://www.beyondproxy.com/investment-process/ Way to go James! I enjoyed the interview and was impressed to learn that James has compounded capital at an annual rate in excess of 25% over the last ten years. :) Wow. There are some very good investors on this board!

Kind of agree. We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold. At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue. The preferreds were so illiquid then that it took us a couple of months to build a significant position. The big thing that has changed now is the financial health of their business. Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures. Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago. Nevertheless, these are not something to bet the farm on. :) Twa - you were the first to the party indeed, but that's not a big surprise!! :) And I generally agree with you and Olmsted. The attraction of this trade is the positive convexity in price outcomes combined with lots of uncertainty and no time to expiry. The convexity part is still positive, but not as attractive anymore.

Packer, here is a copy of text I posted from a similar thread a few weeks ago, FYI: "The 2012 Amendments, as written, do allow the Treasury to take every last dollar from the GSEs over the next 20 years if they want to. But just because they can, doesn't mean they will. This is Washington after all and anything can happen when it comes to contracts especially when a political victory is possible for both sides. Add in a large one-time cash infusion to the government coffers and there is lots more to grease any wheels that appear stuck. It looks to me like the Private Preferred shareholders are counting on the Treasury and lawmakers desire to have a lump sum today rather than a stream of income over decades. Without this desire, nothing happens. In order to receive this lump sum, an IPO is required. But an IPO cannot happen with the Senior Preferred dividend and liquidation preference as currently written, so the Treasury would need to forgive the Senior Preferred. What? Forgive? Why would they do that, its taxpayers money! The key here is that at some point in the near future taxpayers will have received back much or all the $189.5B extended to the GSEs. The GSEs have returned $55B as of 12/31/2012. Add over $90B of valuation allowances against DTA's that are about to be reversed and they are 75% repaid. With IPO proceeds from the warrant position enough to cover any remaining amounts due, politicians don't even need to lie with a straight face to claim triumphantly that taxpayers have been paid back in full plus a big return on their investment, and the GSEs are now capitalized with private dollars. Pats on the back and congratulatory handshakes for all!! How does this help the Private Preferred? Since the new common shareholders can't receive dividends until the Private Preferreds coupons are reinstated, IPO participants are likely to balk unless the Private Preferred issues are addressed. Maybe the Privates get their coupons reinstated, or even better paid in full. Either way the Private Preferreds emerge a winner. This scenario seems plausible, reasonable, logical, rational, and a winner for everyone. Of course this combination may just doom it for failure since it's Washington after all. But that's why the Private Preferreds are getting such longs odds."

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa! Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend. By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred. My mistake was to anticipate waiting until the end of the year before building up our position once again. By then, the preferred had already rebounded and recovered most of the selloff loss. I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1 before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :) Having said all that, the outcome is entirely dependent on politics inside the beltway. :o Indeed, politics makes this an impossible forecast. I bought two years ago and the position has almost tripled. But it's been a bumpy ride as I was down 75% at one point right after the 2012 amendments when Kyle Bass and others bailed. I'm always glad to have someone make a public case for the thesis, but I wish it was anyone but Ralph Nader. The only group that loathes Nader more than the Republicans is the Democrats (they blame him for Bush vs. Gore in 2000). Politicians are spiteful and have long memories!

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa!

Thanks for your response Constructive. Yes, the 2012 Amendments, as written, do allow the Treasury to take every last dollar from the GSEs over the next 20 years if they want to. But just because they can, doesn't mean they will. This is Washington after all and anything can happen when it comes to contracts especially when a political victory is possible for both sides. Add in a large one-time cash infusion to the government coffers and there is lots more to grease any wheels that appear stuck. It looks to me like the Private Preferred shareholders are counting on the Treasury and lawmakers desire to have a lump sum today rather than a stream of income over decades. Without this desire, nothing happens. In order to receive this lump sum, an IPO is required. But an IPO cannot happen with the Senior Preferred dividend and liquidation preference as currently written, so the Treasury would need to forgive the Senior Preferred. What? Forgive? Why would they do that, its taxpayers money! The key here is that at some point in the near future taxpayers will have received back much or all the $189.5B extended to the GSEs. The GSEs have returned $55B as of 12/31/2012. Add over $90B of valuation allowances against DTA's that are about to be reversed and they are 75% repaid. With IPO proceeds from the warrant position enough to cover any remaining amounts due, politicians don't even need to lie with a straight face to claim triumphantly that taxpayers have been paid back in full plus a big return on their investment, and the GSEs are now capitalized with private dollars. Pats on the back and congratulatory handshakes for all!! How does this help the Private Preferred? Since the new common shareholders can't receive dividends until the Private Preferreds coupons are reinstated, IPO participants are likely to balk unless the Private Preferred issues are addressed. Maybe the Privates get their coupons reinstated, or even better paid in full. Either way the Private Preferreds emerge a winner. This scenario seems plausible, reasonable, logical, rational, and a winner for everyone. Of course this combination may just doom it for failure since it's Washington after all. But that's why the Private Preferreds are getting such longs odds.

And converting to common and selling those into the IPO is just impossible and doesn't make any sense. I don't understand. Please explain, thanks.

You can always count on Kraven to make you laugh. You mean, let me understand this, 'cause, ya know maybe it's me, I'm a little fucked up maybe, but I'm funny how? I mean funny like I'm a clown? I amuse you? I make you laugh, I'm here to fuckin' amuse you? What do you mean funny? Funny how? How am I funny? ;D !! Why that line isn't in AFI's Top 100 Movie Quotes of all time, I'll never know. Seriously, it isn't? I would have thought top 10 at least. I mean it's classic. Right after Bogart says "here's looking at you, kid" to Bergman in Casablanca, this is what he says to her. Seems as if they've really messed things up here. Yep classic, right up there with "I think you're going to need a bigger boat".

You can always count on Kraven to make you laugh. You mean, let me understand this, 'cause, ya know maybe it's me, I'm a little fucked up maybe, but I'm funny how? I mean funny like I'm a clown? I amuse you? I make you laugh, I'm here to fuckin' amuse you? What do you mean funny? Funny how? How am I funny? ;D !! Why that line isn't in AFI's Top 100 Movie Quotes of all time, I'll never know.

Yes, quite a shocker in the insurance business I think. Especially considering AIG's turnaround and existing leadership. Good for Berkshire though. Cheers! Four senior AIG E&S managers today, and more sure to follow. This could turn into a meaningful headwind for other E&S competitors including MKL, WRB, FFH, and Y.

Haha what an age giveaway! I'd be shocked if more than a handful of people on this board have ever seen a Pee Chee folder! Kraven...is this yours? http://www.bing.com/images/search?q=pee+chee+folder&id=D94FEC4DF7CBDE19061D8C8823047FF864EF6F45&FORM=IQFRBA#view=detail&id=6A4E1CC2686B9A594B4DB913F2FE4DD3DB24DD86&selectedIndex=107