vinod1

1. Slightly overvalued as it currently stands. I think euro is being held up by Chinese for a variety of reasons and it would be much weaker otherwise. Otherwise I do not understand its current strength. 2. Undervalued if any of the weak countries (PIIGS) exit. Euro would soar once the weak links are out. Theory being a chain is as strong as its weakest link and when the weak links are taken out it leaves a much stronger chain. Vinod

That is exactly the impression I get. I wondered about it whenever I hear his comments on BYD. He clearly seems to distance himself and associate BYD to Charlie. Vinod

I believe there is a lock up preventing them from selling the rest of the stake until 2013 Lock expired this month on their entire stake. I think they are not able to find a buyer for their entire stake. Vinod

In my mind I categorize any investment into one of the following 1. Exceptionals - These have two properties: (a) Businesses which are virtually certain of increasing IV over a 10 year period. (b) Businesses that can survive a 5 year period representing depression like conditions. These businesses have very low levels of business risk either due to the nature of the business itself or due to the owner/operator. If you buy these at reasonably prices, the only question is whether you are getting 5% or 10% or 15% returns, the chance of loss of capital even inflation adjusted is very low. I do not think it is consistently possible to make above 20% returns on a portfolio of these investments. 2. Deep Value - All other businesses that do not meet the criteria above. The quality of the businesses within this category varies of course. These can be net-nets, discount to net asset values, discount to sum of parts, distressed turnarounds, etc. These would give an opportunity to earn really high rates of return. I try to balance between the two though not in equal proportions. My belief is that if we ever encounter near depression conditions, investments of type #2 above are going to be wiped out. Investing complete portfolio with little cash levels purely in type #2 involves some kind of "willing suspension of disbelief" that ignores risk of severe economic stresses for an extended period of time. The above classification helps in position sizing, portfolio allocation and cash levels. Going through 1700 Value Line stocks I made a list of about 120 potential candidates of type #1 that I am in the process of digging deep into. So far I only have about a dozen candidates that I am comfortable to label as type #1 (and most of it involves piggybacking on Buffett's comments and portfolio a.k.a drinking the kook aid). Nothing original here, all the above has been copied from various investors. From Seth Klarman to Myth. Vinod

They have been tracking for non-GAAP earnings in excess of $5 in FY11. And management continues to claim $7 in 2014. Will they make deals that will jeopardize the EPS targets they are promising? In the end, they will be graded on only one thing. I did not find any reference to the 2014 $7 EPS target in the Q3 Presentation or Conf Call. Given that they are making so many changes, management has a good case for saying that the conditions have changed so that the EPS target is not valid anymore - I have a nagging suspicion they made all these changes to avoid meeting the $7 target. Vinod

None of the above Einhorn and Biglari lack his ethics and Lampert lacks his humility ( no humble person would try to turn around Sears for crying out loud ) I think the person who best channels the young Buffet is our gentle host Parsad I just do not know much about his ukelele proweress however to be certain LOL ;D +1

I am surprised at the level of incompetence of the management and board. The direction they are heading makes sense but not the way they are going about it. 1. If you are going to concentrate on software, I would think they would put together a portfolio of related software products over a 2-3 year period. You would try to pick up any companies opportunitistically on the cheap or at least at a reasonable price. They just seemed hell bent on making a large acquisition just to show off their intent. 2. If they want to divest PC business, I absolutely understand. What I do not get is making it public before they have firm plans. Now they have pigeon holed themselves into a position and they would not get the best price possible for this segment. I am getting the feeling that all these unnecessary actions at this time is an attempt to get away from the fact that they had publicly committed to a $7 EPS by 2014. Management must have realized that this is not achievable and these changes would provide a mechanism for management to not meet the target but avoid the responsibility. The stock is cheap with a modestly incompetent management but they seem to be much worse. Vinod

Looks great! And the move was so smooth.

Good luck!

You need to look at individual bonds as inflation expectations are priced at different rates across the term structure. For example as of this moment we have (from http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ ) 10-Year Treasury has a yield of 2.22% 10-Year TIPS has a real yield of 0.01% So the inflation expectation is 2.22 - 0.01 = 2.21%. Since TIPS do not theoretically have inflation risk, there is a certain amount of inflation risk premium built into this 2.21%. If we assume the inflation risk premium to be say about 0.5% (just a guess), then the inflation expectation can be said to be 2.21 - 0.5 = 1.71%. Most people just assume inflation risk premium to be negligible and just use 2.21% as the inflation expectation. You can do this across the different maturities to get the inflation expectation at that particular term. Note: The nominal and inflation Treasuries used above have a slightly different maturity dates since they are not issued on the same date. Vinod

Per the proxy he has about 2.2 million shares/options/stock units at end of 2010. That should be about $15 million. Vinod

Klarman takes a big position in MSFT. http://www.dataroma.com/m/holdings.php?m=BAUPOST Vinod

I'm wondering what kind of reaction MBI share price would have if they annonce 1 Billion $ settlement with BAC concerning the putback. They would crash like hell! MBI already booked $2.7 billion on their BS as if it has been recovered (if I understood it right). I think they are looking at something around $5 billion. Vinod

Wow! That is like 200% nominal portfolio exposure on just what you added!! Vinod

We are in the realm of Generally Accepted Munger Principles (GAMP) so I would gently request GAAP be left unmolested. :) Thanks Vinod

Ratings agencies as a policy in general and historically in practice have limited a corporations debt ratings to its country's credit rating. The basic theory is that the corporation is dependent on the country's legal/institutional framework and therefore never a better credit risk than the country itself. (Dusting off old CFA notes :) ) S&P and Moody only make specific allowances i.e. under particular circumstances where a corporation has higher rating like a multinational that has the support of a parent company with a higher rating. Vinod

S&P is predictably overcompensating for their earlier failures in all the securitization ratings. Vinod

I agree with lower growth rates but that implies lower rate of growth in standard of living - not declining standard of living. If you take out the expected increases in Medicare and Medicaid costs US does not have even a tiny bit of problem in meeting commitments over the next century with roughly existing tax rates, expected economic growth and sustainable debt levels. So the main issue that needs to be dealt with is improving efficiency, limiting fraud and restricting some of the treatments at end of life in Medicare and Medicaid. Many have proposed solutions to these issues but it is more a matter of political will. I guess the public has to feel some pain before there would be a push to solve this problem. I do not really have any concerns on the long term future of US. The current problems are puny compared to that faced by US in the past. Civil war, Great Depression, World War 2 where the very existence of the country is up in the air. We might get a slightly lower increase in the standard of living. So what? I would very happily take this compared to say facing the GD or WW2. Bailouts, money printing, deficits? So what? We get some inflation for a few years (70s) or maybe at worst be like Japan (in 90s) but very unlikely. I see some turbulence in the next few years, but personally if given the choice of the country or the century to live in, US or any of the developed countries at the current time as a no brainer. Just my ramblings, but you asked. :) Vinod

Thanks guys for your valuable feedback. Vinod

I have recently moved towards using LEAPS (primarily in the money Jan 2013 Calls) in my portfolio. Where as in the past I have primarily invested directly in stocks. At this time I am long nominally about 80% of my portfolio size. This uses up about 30% of cash - 15% directly in stocks and 15% in LEAPS. I have the rest of about 70% in cash. I am using LEAP's for four reasons (1) To get around the fact that I have about 30% in a retirement account where my only options are index funds and cash equivalents. (2) Use what seems to be not too expensive non-callable leverage at this time. (3) As an alternative to buying put options to hedge some of the portfolio. Buying LEAP's seemed to me to be better than using up the cash to buy stock + buy put options to hedge some of that exposure. (4) As a way of locking in an attractive price in the future for stocks that I would be happy to own at that price. Board members have commented on their cash levels in a recent thread and it got me thinking on how they are measuring the cash levels and how I should view my own cash exposure. I would really appreciate if you could comment on a few items 1. How do you measure your cash levels? In the above do I really have 70% cash or should I really be thinking of my cash level as only 20% (100% - my nominal 80% long exposure)? 2. How net long as a percentage of portfolio would you be willing to go if the specific stocks in your circle of competence get to once in a generation level of cheapness? I have a roughly 150% net long as my own maximum and wanted to clearly think through the risks in this approach. 3. A 15% of portfolio in LEAP's is giving me about 65% of portfolio net long exposure. I am not sure if this is incredibly conservative or incredibly reckless. Looks like good times (sharp market declines) are coming our way and I realize it would be easy to lever up very easily and get wiped out. In the Great Depression, it is said the really smart people waited for the stocks to get down 50% and loaded up only to then see the stocks fall a further 80%. I am hoping to learn from the experience of fellow board members and any recommendations you have on using LEAP's. Thanks Vinod

I do think we would have QE3, it is just a matter of when. I hope this time they target the long end of the maturity curve (10 year treasuries) unlike QE2. In any case I think the actual effect on the economy is going to be pretty slim. If Ben announces QE3 and all that it entails is shaving his beard, the market would still respond very positively. Vinod

Bad omen :) The last time he brought CEO of Pfizer on just such a call, he sold out of the position in a few months. Vinod

It is "deficit". It is mentioned in the book in one of the first few chapters. Vinod

BAC has changed very significantly in the last few years so I would not put too much emphasis on the reported ROA, ROE of the original BAC. We have Fleet Boston, MBNA, US Trust, LaSalle, Countrywide and Merrill Lynch. Merrill Lynch itself is valued at over $50 billion in early 2000s before much of the housing boom. It might be more useful to look at current and potential PTPP earnings given the built in cost savings that are only a matter of time before they would be realized - foreclosure resources and other costs, retirement of more expensive Long term debt, etc. No need to factor in any synergies at all. They dont need growth, they just need to work through existing problems to generate pretty attractive returns on whatever metric you care about ROA, ROE, etc. Vinod

Try this link http://www.federalreserve.gov/generalinfo/basel2/npr_20060905/npr/section_5.htm Vinod