vinod1
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Posts posted by vinod1
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"It's very rare that you can be as unqualifiedly bullish as you can now" - Alan Greenspan on Jan 7, 1973 in NYT interview.
He also worried about running out of Treasuries due to Govt surpluses in 2000. If there is a Bid Laden life time achievement award for creating the greatest destruction on the United States, Greenspan would be my nominee for that.
Vinod
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(warning: I'm not 100% sure what I want to say in this post, except to share this frustration)
So I know what my next big move is going to be, I want to put a substantial fraction of my capital in something.. But before I can do that I have to wait for something else to happen, and it's frustrating..
Once I own something, I have almost endless patience. It could drop by 50% and if I feel my analysis is still valid, I'll hold it and probably buy more, no problem. I buy things that I know I could own for years, that's my style.
But when I want to buy something new, I tend to have less patience, and get afraid that it'll go up a lot and that I'll have missed my chance. It makes me want to compromise on my plan (ie. sell something else a bit more cheaply than I should to buy this new thing). I know I should just be patient and wait for the juiciest, fattest pitch rather than just a nice fat pitch, and I know that even if I was to miss this opportunity, I'd do just fine with what I own right now over the long-term, but it's still hard, and I really don't want to miss this one.
So anyway, I just wanted to share the frustration and maybe see if others here have the same kind of unbalance patience capacity (no problem with some situations, harder in others)...
I share with you much of the same frustration. Along similar lines
1. Selling something at 50% of IV to buy something at 30% of IV is something I find very very hard to do. I get it but find it very very hard to actually do. This is my main mistake I made during the 2008-2009 crisis, I did not sell off BRK to buy others that are much cheaper.
2. I am still ambivalent towards setting a too firm line in the sand for purchase price. I had been burned on both sides of this issue so I am approaching it on a more gradual basis buying a little bit above my target price.
Vinod
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It looks like the letter is nothing more than a way to secure a book deal.
Vinod
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Northern Virginia.
Vinod
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Like both of them a lot and nearly equally.
Vinod
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3 I have also had the opportunity to listen to Alice speak and she intimated that a great deal of Warrens investment prowress was a result of inside information and that she would reveal all in her next book the great wizard would be revealed to be just a mortal.
I listened to several of her speeches. If I remember correctly what she said is that, Warren got what would be considered insider info nowadays but was not considered insider information at that time. This is basically nothing more than taking directly with managers, etc. Her point regarding being a mere mortal is that he works so incredibly hard, even the gathering of "insider" information, going to insurance commission's office and looking up old records, and all that kind of leg work that very few people did at that time and that is the key to his performance. Her point being it is not like Buffett spends a few hours and just by genius of his insights makes all the money. She wants to highlight the fact that others do not really appreciate the amount of effort he puts in.
She goes on to say that seeing how much effort Buffett puts into his investments, she was discouraged in trying to invest her own money that way, nothing that she cannot compete with someone like this.
She might have some "MAlice" towards Buffett but I still think she thinks of his as one of the greatest investors of all time.
Vinod
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Lots of people use this BS argument: only hedgies or savvy investors love Bernanke.
I'm not a hedgie, but I think Bernanke did the right thing. The fact that he did not engage in QE3 also indicates that he does not just know only one thing (i.e., money printing).
I'd argue that people who are obsessively focused on the purchasing power of the dollar are the ones who are only concerned with their wealth growing. Planned inflation is a tax on savers in favor of debtors. That's not a pro-wealthy policy. That's a redistributive policy that focuses on the employment side of the Fed's dual mandate.
Yes, Bernanke messed up pre-crisis. So did Hank Paulson. But both atoned for their prior mistakes they made when the sh#! hit the fan.
I don't think I am being clear: To me, Bernanke's legacy will not be determined by the inflation vs deflation academic arguments that economists and us finance-types like to discuss. It is going to be determined by the Main Street belief that Bernanke saved Wall Street (which he did and that's not really debatable.)
Now, the nuanced position is that, by saving Wall Street, Bernanke saved Main Street whether Main Street understands that or not. I think this argument is largely correct myself but I do put some blame on Bernanke (more on Paulson/Geithner though) for doing it in such as way as to allow bankers to take as much as they could without restraint (e.g., AIG had negotiated with Goldman for a partial payout of the CDS's. Geithner came in and literally pushed AIG negotiations aside and chose to pay 100% face value unilaterally.)
But Main Street doesn't really believe this nuanced position that Wall Street had get trillions for Main Street to survive and I don't blame them. Whether us technocrats believe Bernanke a hero is irrelevant. I think Main Street will write history on this one.
Paying the counter parties whole and not allowing bond holders to take cuts are the two things that can genuinely be argued. I felt it was wrong at that time but have since revised my view once I realized that the number 1 goal they had in mind is to make all the big financial institutions as strong as possible and using all the tools they can. If you hear Neil Kashkari in his FCIC testimony and read Paulson's book you can sympathize with this view.
Vinod
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Bernanke had been wrong in his views, spectacularly wrong in things like "great moderation" in setting up monetary policy. I do not think there is much of an argument on this.
During and after the Crisis however, his performance is spectacular. He is probably the pre-eminent expert on the Great Depression and has authored several papers on that topic (See the book "Essays on Great Depression") and many people agree that the current environment has many parallels with GD. You might disagree with his views, but he has done exactly, I cannot emphasize this enough, exactly as he said a central banker ought to do during a similar crisis. He did not have great political support for all this but he did what he thought needed to be done. What more can you ask?
Vinod
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We should differentiate his performance pre-2008 financial crisis from the post-2008 financial crisis. I agree with most of the criticism of his performance prior to the 2008 crisis. But during and after the financial crisis, I cannot think of a single person who is more suited, more qualified to do the job and what an outstanding job he did. It is lucky we have him as the Fed chairman.
Unlike Greenspan who is more of a politician, Bernanke is willing to do what he really believes in and is willing to take unpopular actions.
Vinod
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EIA report on impact of export of LNG on NG prices in US.
http://www.eia.gov/analysis/requests/fe/pdf/fe_lng.pdf
Vinod
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I think he is pissed off at something or some promotion that he did not get and this is his way of getting back and covering himself up in glory. I think the culture at all IB was always "buyer beware". I would not put too much faith in someone who has worked for 12 years at an IB and suddenly realizes that the IB is not putting the clients first.
I sold my GS calls yesterday at close so I do not have any stake now.
Vinod
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I agree with the feedback above. I learned the academic theory of options as part of the CFA program but I did not find it of any practical use. Reading Ericopoly comments and then spending time to think through helped me immensely in understanding options in practice. I remember copying some of Ericopoly's comments into an email so I can revisit them and think through in more detail later on.
Vinod
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I might observe that some books have negative value. (Not necessarily the one in question because I've not read it.) There's the opportunity cost - as in that's X hours I won't get back. Even worse is the cost of absorbing poor mental models. Those can be quite expensive ... As a result, I've become rather more selective in my book reading over time. (Wow, that was overly grouchy ;) )
Yes and I think the vast majority of the investment books do fall under this category. Over the last couple of years I have drastically cut down on the number of investment books I read just for this reason.
Just think what is the value of a leather bound book containing verbatim all the comments on the Level 3 thread. I would pay a large amount to avoid reading such a book, just to avoid suicidal thoughts!
Vinod
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I am very cautious regarding all things relating to China because of some of the things posted here. Not that i think I have any real amazing insight into it but everything I see gives me an uneasy feeling around it.
But it is interesting ready 3rd Avenues (Marty Whitman) quarterly reports and see them concentrate more and more on the Hong Kong and china real estate related positions.
Has anyone else been reading the same thing and wondering about it?
I wonder if I am missing something about his positions that makes them safer then they appear.
I keep wondering about the same about Whitman. I think his asset value centric approach leads him to place a little bit too much emphasis on "readily ascertainable net asset values" which might overlook overvaluation when the underlying assets are overvalued. I think Whitman is very smart but I cannot help but think this is his weak spot.
Vinod
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It's my only long position. My only short position too (short term put hedges purchased recently).
Man do you move fast. What strike/term hedges did you buy?
Vinod
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Suppose Berkshire winds up with 1.5b shares (including warrants). That adds $3b+ look-through earnings. How much does that increase Berkshire's earnings power, percentage wise?
I think BRK needs to be under 10% ownership of BAC so I think the upper limit is around 1.1 billion shares. So given his 700 million warrants, the max that he is likely to buy is about 400 million shares.
Vinod
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I don't think anyone is questioning this, surely no one is saying anything else than that Apple will continue to grow in the short to medium term.
For me this boils down to one question: which one is more likely, that Apple has changed the economics of the tech business for the forseeable future or that their current earnings is an anomaly and will revert back to the mean? As long as I don't see a significant moat that will change the product cycle of cell phones, computers and tablets, I have no way of knowing that Apple's revenues will be at the same level in 10 years and much less their earnings. Thus, I can only have the standpoint that the top dog in the hardware tech business will continue to change every few years.
Last quarter's earnings are an anomaly helped by:
- Delay in iPhone 4S that pushed demand into the last calendar quarter
- Steve Job's death and the release of the book that created massive publicity for Apple.
So I don't expect 100%+ growth again. But Apple is not going to go from growing 85% to negative growth overnight either. Apple has been building a moat quietly. They have 85 Million people who have their photos, documents, contacts on iCloud. Millions who have bought music on iTunes or magazine subscriptions on Newstand or books on iBooks or spent money on apps. Millions who use iMessage for free messaging. A switch to an Android phone would mean walking away from all the money you have spent on the platform. The longer you own an IOS device, the more you have invested in purchasing things on it, the more you will leave behind if you switch. That is one reason why Apple is building things like textbooks, etc. Also, there is no simple way for you to move your data over to another platform.
The longer Apple stays, the harder it is to dislodge them.
I have nothing but goodwill towards Apple the company and I am not particularly savvy about the latest gadgets, but I just do not see any moat here.
I remember hearing about the moat around Yahoo's email and AOL's instant messenging network. I do not see why anyone would be particularly bothered by walking away from a couple of hundred dollars worth of investment at the most in apps. Also I think it is pretty likely you would have ability to import/migrate the books and data to newer apps at some point in the very near future.
At a $400 billion market cap I would think most Apple investors would be counting on earning it back in the next 10 years i.e. undiscounted earnings of about $400 billion over the next 10 years at a very high IRR. If such a large profit pool at supremely high attractive rates of return does not attract competition and drive it down to more normal levels, I would be very surprised. Not saying it is going to happen, but that would be the way to bet IMO.
Thanks
Vinod
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A little bit more info at this link
http://www.cfo.com/article.cfm/13981499/c_2984321?f=SBU/FinanceProfessor
As it stands now, banks can't be reliably compared to each other by their recorded cash flow from operations, the researchers contend. Their observations stem from their study of the cash-flow reports of 15 of the largest independent and publicly traded U.S. commercial banks in terms of total assets as of December 31, 2008. "Right now, operating cash flow for a bank is basically meaningless," says Charles Mulford, director of the Georgia Tech Financial Analysis Lab, who co-wrote the study with fellow accounting professor Eugene Comiskey.
Vinod
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Good article PlanMaestro!
I am little surprised that you start with the Cash Flow statement. Just for banks, I have been ignoring the cash flow statements (I use some of the data points in them). Not the best summary but the following link makes some points about issues with cash flow statement for banks.
http://www.nysscpa.org/cpajournal/2007/307/essentials/p26.htm
Personally for each business segment, I would try to estimate the Net Interest Revenue, Non Interest Revenue and Non Interest Expense seperately starting with the Financial Statements and noting down any one time or non recurring items. This then gives me the PTPP. Using this I get $9 billion for USB at Q2, 2011, the last time I updated my estimate for USB.
Vinod
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How about interest rate?
My list is definitely not comprehensive. Just wanted to point out what I thought were not very obvious ones like the mortgage related charges for example. You would also need to back out the asset sales from revenue.
Vinod
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I have looked at this thing time and time again, and still continue to struggle....
For 2011, PTPP income was $17 billion, and if you add back the $12 billion of cost savings Parsad and Eric refer to, "normalized" PTPP is around $29 billion. Are you guys modeling higher PTPP due to future revenue increases, or does BAC becoming "lean and mean" involve a lower revenue base?
Loan loss provision seems about at normalized levels, $13.4 billion, so pre-tax income is $15.6 billion, and net income $10.1 billion assuming a 35% tax rate.
Shares out as of FYE were 10.5 billion, so normalized EPS is $.96.
Curious what type of normalized EPS figure board members are looking at....
In your $17B PTPP you are assuming the following costs that have been realized in 2011 would recur indefinitely into the future:
–$15.6B representations and warranties provision
–$6.3B mortgage-related litigation expense and assessments and waivers costs
–$7.3B of other noninterest expense in Legacy Asset Servicing
There would always be some costs for each of the above items and you have to come up with your own estimate of what the reasonable numbers are. Your estimate may be higher or lower than above but at the very least I would expect anyone trying to come up with an IV estimate to make adjustments to the above numbers.
On top of this you have planned operating cost cuts which one might reasonably incorporate into their IV estimates.
We can ignore many things like (a) growth (b) synergies via cross sell which not many have done successfully © better loan quality and consequent lower loan losses on loans made during periods of stress. All these are likely but it is hard to put a number, so we can ignore them.
Vinod
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Vinod1 - I could see that happening to a small extent, but unless the windows phone is truly better I don't know if they will get enough for them to get a good IRR. If people are only switching to try something new then the revenue stream created from the windows phone might be extremely short if another company introduces something else. I'd view that as a kicker more than anything I would count on. It is interesting to think of china and india though, evidently the iPhone isn't as much of a contender there so there can be real opportunity.
This has been a helpful discussion for me, thanks.
I do not disagree with you. I see no lasting loyalty to mobile phones by users. It is more like women's fashion. At different periods I see different phones becoming popular. The history of mobile phones has though very limited, has been consistent with this theme. Motorola, Nokia, Apple... I would think others including Microsoft having their turn at some point in the future.
As phones get more sophisticated, the degree of differentiation between #1 and #2, #3, #4 would be considerably narrowed and people would not pay that much of a premium for the #1 phone at that point. As Greenwald says, everything is a toaster in the long run.
Vinod
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Does anyone have any thoughts on MSFT's strategy to compete in markets where a clear dominant player already exists? The people I am around LOVE their iPhones, my friends say "Google it" instead of search it. I see those two businesses as highly entrenched. Bing has been gaining market share but it is still a small player to Google globally.
I don't see anything that MSFT is bringing to the table to convince people to leave the products they have a strong affection for. I don't know much about Window's new phone, but I suggest it may be very hard to get people to part with their iPhone's. Are they addressing any problem that apple does not address or add features that the iPhone cannot compete with? I looked up Windows 8 phone and it appears details are lacking from MSFT on it so far, anyone have a useful link they care to share?
Maybe I was wrong to say they haven't done anything innovative, they just haven't done anything innovative that I have found impressive. I don't have much confidence in their ability to compete with google in search of apple on phone's and wish they left that money to shareholders.
I think there is money to be made on MSFT at today's price, but I would say that is in spite of their capital allocation.
Over the past few months several of my friends moved to Android, all of them cite just one reason: After using iPhone for so many years they are sick of it and want something new. They are very likely to try the Windows phone if it is sufficiently good. Windows phone does not have to be the best to get a fairly good market share, they just have to ensure it is close to par.
Vinod
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One thing I'll give Microsoft credit for with Metro & Windows mobile is that at least it's not a blatant copy of Apple's iOS like Android is.
Exactly, Microsoft has been releasing some very innovative products like Kinect and Surface. Their Metro UI takes an active tile-based approach which is very different from the iPhone icon based approach. The Metro world takes simplicity to the extreme unlike the textured, eye candy world of the iPhone. They are completely different philosophies.
Google releases clones of competitive products with small changes - Android, Google+, Propeller, Google Offers and so on.
Yeah this was one of the concepts that was highlighted in "Great By Choice: Uncertainty Chaos and Luck—Why Some Thrive Despite Them All" by Jim Collins - the idea was that of the company that was able to "riff" on the successful idea of another company and execute the idea better than its creator (largely by applying the other concepts in Collins' book, which is very worthwhile). Memorable examples cited in the book were Southwest Airlines, Microsoft and Apple. The companies that master this skill are at a significant advantage.
As a consumer, I expect Google to reproduce some version of anything attractive that their competition provides, and they seldom disappoint.
Off Topic: Since Jim Collins is mentioned I thought I would highlight something I read recently.
Jim Collins "research" has been throughly discredited as fundamentally flawed. The book "The Halo Effect" goes into this in detail. This is a pretty good book that is very helpful to investing in general and a huge time saver by helping you to recognize business books that are popular but are complete bull shit.
Vinod
Is your home an investment?
in General Discussion
Posted
Did you include estimated annual maintenance expenses in your cap rate? If so, could you please share that rate?
I am currently evaluating buy/rent decision and kind of conflicted on this one. I currently pay $3000 monthly rent on a house that the owner would be willing to sell around $575K. It is a 10 year old house, property taxes of $6K. Assuming home owners insurance and other costs that I am not paying to be about $2k, I get a cap rate of about 5%. Assuming about 1% in annual maintenance costs, I get a cap rate of 4%.
Vinod