vinod1

Thank you!

Anyone know what type of investment FFH has in Intel? It looks like its value is about $1 per share/unit and it is not a call or put, so what can it be? Thanks Vinod

I track the warrants of about 10 companies. Here is the URL to get more info from Nasdaq on these http://www.nasdaq.com/aspx/flashquotes.aspx?symbol=ROICW&symbol=C/WS/A&symbol=AIG/WS&symbol=CMA/WS&symbol=JPM/WS&symbol=VLY/WS&symbol=PNC/WS&symbol=BAC/WS/A&symbol=WFC.WS&symbol=COF.WS&selected=ROICW I know that Ford, Lincoln National, Washington Federal, Hartford Financial and First National Bankcorp have warrants outstanding. You can check these from Nasdaq. Vinod

This is pretty much what Buffett seems to have said at the AM. Question 29: Crowd- Questioner asked a question about goodwill, including goodwill when you calculate return on equity and write offs of goodwill. Buffett: The AOL-Time Warner goodwill should have been written off. In general, goodwill should be not amortized, but should be written off when necessary. Goodwill should also not be used in evaluating a business. What the management is doing and how the operating businesses are doing are what the most important factors. In this case, the focus should be on returns on tangible assets. But when you are assessing how well he and Charlie are doing in calculating return on equity, you need to include goodwill. Vinod

The vast majority of the companies have link to "Order Printed Materials" on their investor relations section of their website. It allows you to order Annual Reports, 10-K's and 10-Q. I have a auto form filler plugin installed in Firefox to make it easier to fill in these forms. I get the majority of the forms this way. For companies that do not have this link, I email the investors relations contact listed on their website. Only 2-3 companies do not mail printed reports in among the 200 odd companies that I follow. Vinod

I just checked and it seems to be working fine. You can give it another shot and if you still have a problem, email me at vpalika in the hotmail.com domain. Vinod

There is overlap between the normalized earnings and the investments. We can either do pure look through earnings i.e. his normalized earnings of $12 billion + share of undistributed earnings (adjusted if he already included dividends into normalized earnings) or the standard two column. Either way I think IV is coming to a little above $100 per B share. Vinod

Thank you Sanjeev! Vinod

Henry Singleton?

Thanks for the caution. I just digging into this in a little more detail as it is very intriguing due to size of Berkowitz's bet and no obvious undervaluation. Vinod

Has any one understood the rationale for AIG warrents issues to stock holders? These are issued only to private stockholders (at 0.53 warrents per 1 stock) so the US Govt with 92.5% stake is not getting any warrents. So it effectively means that the ownership of private stockholders is being increased at the expense of US Govt. To me it seems a scenario something like this seems to have happened: The US govt seems to be making quite a bit of money on AIG and much better than say in Freddie/Fannie or on the Banks and this is a backdoor way to reduce some of the US Govt profits and pass on some of the better than expected showing "profits" back to shareholders. I cannot think of any other reason for the issuance of the warrents. Vinod

Isn't this ratio less valid than before since a lot of companies in the S&P500 are heavily active abroad? ex: Caterpillar have plants and operations in emerging countries that if I'm right are not counted in US GDP. That's an excellent point. I wonder how that ratio might be adjusted to account for the proportion of overseas business over time? Dont really know how to adjust for it. This is also closely related to increase in profit margins in US. Most low margin business has been outsourced to developing countries so naturally the profit margins have increased for US companies in aggregate. So this is a big risk for GMO and those of us who tend to take the same attitude that profit margins are going to mean revert - "This time is different". :) Vinod

I think we differ in how inflation should me measured. To me the way BLS measures inflation seems reasonable. We aren't differing in how it's measured. I don't think they should measure it in a different way, because it would be nearly impossible to track in the way that I've describe it. We are differing in how we think of inflation. I think that if I hold cash, for example, it should buy more and more goods every year because of the productivity advances. But it doesn't. It buys less. And we should be able to buy more in a 0% CPI environment (with productivity gains), but we can't due to inflation. Perhaps bad terminology on my part. I do not think I disagree with you. In my own calculations I always factor inflation + increase in living standards (a close proxy to productivity increases) as the minimum growth needed to protect the purchasing power of my assets. Vinod

Taleb seems to me like a man with a hammer syndrome... It has a lot of offer the investor but it is not the basis of an investment strategy. To me the most important points are (1) Ignore standard risk models - anything that uses std dev, beta, etc. (2) Future is unpredictable and mostly develops in random ways, so be prepared to handle black swan type risks. (3) Be particularly skeptical of causality explanations. Vinod

A good article on current market valuations - several methods of valuing the overall market. I pretty must used to do the same calculations, so this guy made my life simple. http://www.valuewalk.com/stock-market-valuations/stock-market-valuation-february-2nd-2011/ Thanks Vinod

S&P mini futures. I have not done it and not sure about the exact mechanics, but that is one way to hedge. Vinod

You are probably correct, I just picked up a random example. Vinod

I think we differ in how inflation should me measured. To me the way BLS measures inflation seems reasonable. You seem to be saying that productivity improvements should be considered - that is the cost to produce a good, must be incorporated into inflation. I do not think that should be the case. Cost savings as a result of productivity improvements gets passed to consumers when the business does not have any competitive advantage. In your road construction scenario, those businesses do not have any competitive advantages and the cost savings are realized by consumers as a result. This issue is separate from how inflation should be measured. Car companies might have a small competitive advantage as result of brand preferences (but not much, although I am not that familiar with these companies), hence they might not have passed on all the cost savings as a result of any productivity improvements they might have made. Vinod

Thanks! Sorry that is the latest that I have. I only update my "inevitables" about once a year when the AR's comes out. Since IV of these companies do not change that much this works out for me. Vinod

I wrote a short article on this for those returning back to India at http://vinodp.com/documents/nri/standard_of_living.html. Imagine that you were living in America in year 1950 and earning as much as the median (50th percentile) American family did in that year. Suppose, in that same year you happen to receive a large inheritance, which your financial advisor then calculates would be enough for you to retire. His calculations shows that you can withdraw the same amount as you are earning now and adjust each year for inflation to maintain your standard of living. You decide to follow his advice and retire. Fast forward to year 2005. You would be surprised to learn that your standard of living is now only marginally higher than that for a family living in poverty (poverty is around the 12th percentile) in America in 2005. By 1994, you would be having a standard of living around 20th percentile - poorer than 80 percent of the population. Most people would not consider this to be “maintaining” their standard of living! Vinod

Say you buy a car in 2000 for $20K without ABS. Now, if you can buy the same make, model car with ABS for $20k. Then you would say there was 0% inflation. But in reality, you had deflation, price did fall, if you had considered the quality improvement. This had been the case in many goods and services. Thus BLS uses hedonic adjustments to account for quality improvements when calculating inflation. When we calculate inflation, we need to take the quality improvements into account. We are increasing our standard of living every year. If you accurately calculate the inflation (without quality improvements) and only increase your expenses by that inflation measure, you would find that you would be falling behind the rest of the country in standard of living. Vinod

Not true at all. Option market makers are quite sophisticated. You can observe "volatility smile" and "volatility skew". Volatility smile means that implied volatility is higher for out of money options than at the money options. And volatility skew means that the implied volatility is higher on one side of the strike price than the other side. This is completely contrary to log normal distribution. You are correct indeed. However, the point I think Taleb makes is that option pricing models as much as they are tweaked (either via a skew or assumptions of higher volatility), do not really price black swan type events. Vinod

They have iShares ETF under their umbrella which has the broad market indices. So they tend to own pretty much every security in the US. Vinod

If I remember correctly he buys way out of the money options. Options are priced with the assumption of something like normal (lognormal) distribution. Thus way out of the money options are underpriced if returns do not follow the neat lognormal distribution i.e. black swan type scenarios tend not to be incorporated into the price. So his strategy losses small amounts of money regularly with the occasional home run. Thanks Vinod

I think he means $1 in current normalized earning power. See his comments below. CONSUELO MACK: And so, when you look at, you know, a Citigroup, for instance. Let’s just take them one at a time. I mean, it’s value now. Do you think that there’s still a lot of value left? BRUCE BERKOWITZ: Yes. Citigroup has the ability to earn a dollar a share, which would put it at $10, let’s just say. And you compare it to where it’s trading today, four. Under four. Vinod