bargainman

So I've been reading the discussion about Sears, http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/1775/?topicseen and like a lot of discussions on message boards on the web, even the best boards like this one, there seems to be a reasonable amount of emotion, and also some amount of black and white thinking, or at least people arguing either just one perspective or the other. There is also a lot of great information. I personally try to think of things in less of an "either or" way. I think of things, especially these sorts of scenarios, in both probabilities for the short term and the long term, and also decision trees to analyze actions that I might take on those probabilistic scenarios. Well, that was certainly a bunch of mumbo jumbo and jargon, so let me get started on the actual meat: Before I get started on the probable scenarios in the short term and long term, these are my potential actions on the stock: inaction purchase by proxy by participating in fairholmes fairx fund, purchase directly by buying shares and potentially participating somewhat in lending out my shares to shorts and making some money that way, buying longer term options primarily call leaps, and or selling short term options, primarily puts. With that out of the way, let me list the short term scenarios and the long-term scenarios and attach probabilities to each. Short term possible events Bankruptcy - very low probability Stock dropping to 30 -low to medium probability Short squeeze -low to medium probability Spin off of some sort which may cause annoying taxable or tax related event -medium probability Eddie brilliantly turns around the business and makes it profitable - pretty low probability Long-term possible events and outcomes Bankruptcy -very low probability Lost opportunity cost where assets follow or slightly trail inflation before Eddie is able to monetize properly -low to medium probability Short squeeze that pops the stock up at least 50 to a hundred percent -high probably Eddie becomes the next Jeff Bezos and turns this operation into an Amazon like machine -very low probability Stock goes below 30 permanently reasonably low probability Eddie winds down ESL and makes this his primary investment vehicle -medium probability Now I have my reasons for assigning these probabilities but if I went into all of those this message would never end :-) so let me analyze my possible actions. I already own a reasonable amount of the fair holme Fund so no action required there, I will participate in Sears depending upon the whim of Mr Bruce Owning Sears directly might be OK, especially since my broker gives me some interest for lending out the shares, but the factors here are that I only get half of the total amount of interest for the shares lent, I also feel the pain when a split or spin-off happens and I have to figure out what to do with some spin off stock. Also in the scenario where the stock does nothing I have the lost opportunity cost, minus of course the interest I was paid. But generally here I am using a reasonable amount of capital and betting on Eddie monetizing quickly enough that the stock becomes worth something, or waiting for a short squeeze and selling out then. Options, now here is where it gets interesting . First a word on pricing, for some reason at this stage, short term close to the money Puts are earning 40 to 50 percent annualized. Long-term calls are charging about 12 percent annualized at the money 2015 leaps. So if I believe that in the short term the stock won't drop too far below 30 and that in the long term it won't do so either, I can probably make a reasonable amount by selling short term close to the money puts and rolling them as necessary. How long those premiums will last, at those strike prices, I do not know, but they have been pretty high ATM consistently. Now if I believe that in a slightly longer term there is a reasonable chance of a short squeeze, it doesn't cost me a whole lot to buy some out-of-the-money call leaps so that I am exposed to any possible upside without a large investment of my own capital. You can probably guess what my actions have been and will be going forward. I agree with many that this is not a slam dunk 1 foot hurdle. I also agree that Eddie didn't become stupid all in this recent period. I also agree that there is a reasonable difference between somebody running a hedge fund and that same person running as CEO of a retail business successfully . I see a significant difference between him and Jeff Bezos merely starting with the fact that Jeff Bezos is a trained computer scientist with significant interest in other sciences, while Eddie is a trained economist. Jeff Bezos also seems to be very inspiring and visionary whereas Eddie seems to be reclusive uninspiring but still rather data-driven. This is not to say that Jeff Bezos does not have his faults. But enough about that. I won't draw too much of a comparison with Warren Buffett other than to say that we all know he studied Warren deeply and we all know about Eddie's record. As far as the actual end game goes I really do not see a way out for Eddie, he either needs to fix the retail side of Sears, monetize the assets and invest in something else, do some combination of the two, or just keep sinking slowly. So what am i doing then? I trust Mr Bruce enough that I am willing to keep holding My fairholme shares. I feel like the stock is paying significant short term options premiums with reasonable downside risk that will be offset by those premiums in reasonable order by rolling. It also feels like those short term premiums make up for the potential opportunity cost outlined above if Eddie is too slow to monetize and the business keeps deteriorating too fast . I feel like in the long term and even the shorter term there is enough impetus for a short squeeze that could spike the stock given the short interest and the small float. As such with the leaps costing a reasonable premium, I am exposed to this potential upside for little cost or at least reasonable cost. Now both sets of options would be exposed to the spin-off issue, but I guess you can't have everything. Now if I could do that in my non taxable account that would be great, but I cannot. I would be interested in hearing how others are trading this stock and dealing with the possible probabilities and different scenarios (also what probabilities people assign to the possible scenarios). I started a separate thread because I didn't want this particular thread to turn into something focused on what could happen, but rather something focused on what actions one could take to take advantage of the possible scenarios. Hopefully that makes sense but since it's late over here maybe it doesn't :-)

so what is the best way that people have found to read this site? I have both a smartphone at a little under 4 inches and a tablet close to 8 inches, and using the standard website view is far from ideal especially given all of the small links to click. any suggestions?

looks like there are social based apps and sites looking to crowd source taxis too: http://news.cnet.com/8301-1023_3-57596389-93/airbnb-lyft-and-taskrabbit-partner-with-share-economy-advocacy-group/ Lyft, sidecar. Relayrides looks like another version of getaround.. It's getting interesting in terms of making currently unused assets useful..

You didn't mention http://www.getaround.com/ which I think already has as many or more 'available cars' than zipcar. It's a pretty ingenious model. http://www.getaround.com/about http://www.getaround.com/tour

I agree in general with this approach.. Who says you need to buy all at once. One guy at the fool I used to listen to, who had years of experience and was very successful at holding many many stocks over years, talked about buying in thirds. I think it's a good approach Buy a core, never sell position. Then buy another third when it reaches a good valuation, and another trading position. It's averaging in. You never know if the stock will come down to your required valuation, and if you like the manager, time is the friend of the great business...

I think there has been plenty of rational discussion. But, the message you just wrote does not fall into that category. The original message does.

I have just learned that the bill probably lied! :-) Here is what just happened. My doctor sent me a 'prescription' to a MRI place. I noticed that this place was not 'in network' in my insurance. I called them up and asked them about it. They said that the MRI price was $2700!!! I asked them what my insurance would pay? They said probably $2100! Amazing.. Then I called up a few of the "in network" MRI places which agreed to the Insurance 'contract pricing'. When I asked them the price they said the same thing about $2500. But then I asked about the cash price and one place quoted $500! Then I asked them about the insurance contract pricing and they said it was $475! (called 3 places and they were all within that range.. list price 2500, contract price 475) So like many things, it seems that the 'list price' or "MSRP" is a bunch of baloney. I still can't believe that the out of network place would cost $2100 vs $475. I suspect I would not know the actual price unless I actually went through with the procedure, but I'm not going to tempt fate. I will go "in network".

Care to guess how many times Buffett has punched his card? Saying things in an interview as a public figure is fraught with peril. Almost anyone can be quoted arguing against themselves, even Buffett.

Well, you left out the options strategies ;-) But wrt Meditation I would encourage you to look at HRV training. Here are a couple of interesting ted talks: It's basically a biofeedback device that gives you some hard data on what the state of your biology is while you're meditating. The problem with meditation in general is that it's very easy to do it 'wrong'. With realtime data, it's a lot easier to get yourself into what's called a 'coherent' state.

Definitely do some studying on options. You can always find something to do with them regardless of the market's bubbliness. One example is to hedge by doing a ratio spread (or backspread, I forget the exact term). For example you can usually buy 1 put at the money, and then sell 2 put options at a lower strike, for net of zero or a slight credit. That will basically hedge you part way, but give you some downside protection if the stock/market tanks. Up until the lower strike price, where you will be forced to buy a stock at that price (since you sold 2 puts). But if the market stays stagnant or goes up, the hedge doesn't cost you anything out of pocket. But it does cost you buying power (It's not free for sure). Anyway there are a ton of credit or debit strategies that wlll keep you busy and let you profit in whatever scenario you choose. Just make sure you don't use all your cash or buying power, or you wont have money to take advantage of the eventual swoon.

It's impossible to achieve the returns in the screens since they are theoretical, rebalance monthly, don't take slippage and liquidity into account, etc. The Shadow Stock portfolio, however, is a real money portfolio. If you follow the trading guidelines, you have a good chance of replicating the results. Beware that it is a very volatile portfolio, though. Their screens performance is flawed, although in the grand scheme of things it shouldn't matter that much. Their performance assumes that each stock in a screen is purchased at the beginning of the month based on the end of the prior month's closing price. However, the screen itself doesn't come out until the middle of the month (each screen is updated on the 15th day of each month). So they have assumed a purchase based on "future" information. Of course the screens are just representative in a sense and it could be argued that it all evens out over time, but still it feels wrong to me to publish data that would be impossible to actually replicate. I think this is true if you go for the standard subscription, but if you get their 'pro' product, then you get to run the screen yourself whenever you want.. I wonder what the slippage is on a real implementation...

Does anyone out there follow AAII's screens and/or shadow portfolio? Their returns are pretty phenomenal, but I wonder how easy/difficult they are to actually follow, especially in a taxable account.

Just FYI: Investment Objective and Strategy The investment seeks to replicate, net of expense, the Morningstar Wide Moat Focus Total Return Index. The index contains companies that have sustainable competitive advantages and that trade at discounts or Morningstar's determination of their fair value. It contains approximately 20 companies.

You also might be earning $500k from your labors, but if you neighbor "earns" $500k from passive income while hiking the National Parks that is an entirely different meaning of rich. Eric, Excellent observation. It is what I live for.. freedom! Thankfully freedom can be had for much less. 8) Reminds me of the story of the businessman and the mexican fisherman: http://www.wanttoknow.info/051230whatmattersinlife

mpauls, Couple of things that should provide some food for thought to you (and the other detractors): 1. Which set of investors have been with Sardar the longest? 2. How have they responded to the incentive agreement and Sardar's subsequent actions? Best, Ragu 1. Lion fund investors 2. they don't care since they always paid him the pound of flesh he's requiring of all SNS and BH holders now. A few of questions for you. You have 70%+ of your portfolio according to another post. Why? Also, there are several members on this board who have interacted with and done direct business dealings with Sardar, have you? Those members have left Sardar and concluded he's arrogant, has an enormous ego, will not listen to anyone else's opinion, the board has no governance, he's not to be trusted by shareholders, among other things. What makes you discount those opinions of direct contact by very smart and high integrity individuals enough that you would risk most of your portfolio capital with this man? Disclosure: I own BH, but very low single digit percentages. I would put giofranchi's 5% as the upper limit of any portfolio amount to go into BH given his history.

THis was a really inspiring talk:

Watched this talk, and apparently he is controversial.. I'm certainly not qualified to render a good opinion. http://organicfarms.wsu.edu/blog/climate-change/savory1/ "Savory is a controversial character amongst the scientific community, both deservedly and undeservedly. From my perspective, there are three basic reasons: 1) the scientific literature supporting HM is considered by many of his peers to be inconclusive, 2) HM includes some unconventional approaches, and 3) Savory can be less than flattering in his commentary about other scientists and scientific institutions. Savory has been the target of some fairly harsh criticism within the rangeland science community, none more critical than a paper by Briske et.al. (2008) concluding that the experimental record for short-durational grazing systems (that they consider equivalent to HM) was inconclusive and therefore doesn’t support HM recommendations. They conclude that most of the science used to support management recommendations for these systems is either anecdotal or statistically inconclusive because the experiments were poorly designed (they didn’t isolate single variables for analysis). Savory and his closest proponents (Teague et.al. 2008 – strangely, a co-author on Briske et.al. 2008) have provided rebuttals arguing that Briske et.al. mis-represented HM in their study sample and that their conclusions are, consequently, not relevant. While I don’t think that critiques are necessarily a definite dismissal of the legitimacy of HM, I do think they raise an extremely valid question … “Where’s the data?”"

Take a look at the first message in the thread. The ROIC example shows how to do it. You need to get the information from Yahoo since Google finance doesn't give yield for stocks (they do for Mutual funds for some odd reason..)

Just wanted to point out something, maybe obvious. But remember, the person who buys has the right, but not the obligation to the contract. (Call == right, but not obligation to buy stock at strike price at any time between now and the end date - for American style options. Put == right but not obligation to sell the stock at strike price at any time between now and the end date). The seller of that option is basically the opposite side of the buyer. So they have the obligation to buy/sell the stock at the strike price at any time between now and the expiration date. Now, as stated, usually the buyer will not exercise their option if there is any time value left in the option unless there is something else going on. But as the seller you must be prepared to to fulfill your obligation at any time. (For american style options. For European style, the obligation is only at the end date) So if you own the option you can force exercise at any time by telling your broker. If you sold the option, you can't do anything if this happens other than close the position asap or keep the stock/short.

4 decades? seriously? wow.. At the pace things are changing, and that change is accelerating, predicting anything 4 decades down the road seems kind of out there. Think of where technology will be 4 decades from now. Read some of the wild stuff proposed by Ray Kurzweil who has studied this extensively, then try to make a prediction... I agree with a later poster that here the jockey bet might be the best... Solar looks like it's following a Moore's law-like trajectory: http://blogs.scientificamerican.com/guest-blog/2011/03/16/smaller-cheaper-faster-does-moores-law-apply-to-solar-cells/ Cloud computing gets applied to new fields. Genomes will be sequenced at lower and lower costs. Driverless cars might make driving more efficient. The availability of the cloud and the future application of Moore's law to all sorts of fields will cause really unforeseen changes. I think that trying to project out 4 decades is really really hard if not impossible... Sorry if this seems like a tangent to commodity prices, but I don't think it is...

I agree that EMH is probably one of the best ways for the average investor to invest. Even Buffett says most people should just buy an index fund. People could do a *lot* worse than buying a cheap index fund via dollar cost averaging. In fact many people do do a lot worse by trading in and out of stocks and mutual funds. There are countless studies showing that the average manager underperforms, in fact I think it was 70-80% who underperform. So if you go that route you're stuck trying to discern which 20-30% of managers will outperform. There are also studies showing that the average mutual fund performs better, by a large margin, than the average investors in the same mutual funds, since people pile in when the MF outperforms and get out when it tanks! I think the market is very efficient, just not completely efficient. For most people if they are taught EMH which IMO is about 90-95% correct, I think that's just fine. I don't think it's 'asinine' at all.

I think the 'official' Loews thread now resides here: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/l-loews/ Might be a good idea to post this there instead?

Saw this a few days ago. very impressive.

There's also the built in advantage of their AAA/AA credit rating. A friend worked for Clayton homes, and he said they could basically access credit at insanely low rates since they were part of BRK. Their competitors had no such advantage.

One good reason why I can't convince myself to pick up GLRE...