Parsad

So with Steak & Shake, Fairfax, WFC back in 2008, and your most recent undisclosed acquisition, I'm assuming you had determined in one way shape or form that your investment had a very low probability of permanent impairment, as should all value investors with all investments. IDK anything about Fairfax, but I'm assuming when it was distressed, you were able to readily determine that in a worst case scenario, such as a liquidation, that your investment would be made whole, no? Same with Steak & Shake - worst case scenario, perhaps the real estate, cash, and receivables would cover your investment while any upside from operational improvements would be pure upside. Correct with Fairfax. We thought in the worst case scenario, there was enough margin of safety that we would walk away with most, if not all, of our capital. With Steak'n Shake, they were burning through cash and Sardar had a limited amount of time to raise cash...we bought through call options and then exercised them over the next few months as they had raised cash from a tax refund and things improved on the operations side. With Wells, the bet was that the credit quality of their loans were better than other banks, and we bought at a little over half of book in 2008. This is where I struggle with BAC. The upside case is very obvious - IMO, the downside protection in a worst case scenario is NOT. We can argue all day long whether or not a worst case scenario will actually materialize, but assuming there is a greater than 0% chance of one, where is the downside protection? Asset valuations are stretched to the max, are they not? In a liquidation scenario, how is BAC's "Other Asset" category going to hold up? How are the "trading account" assets going to hold up? How are NPAs going to hold up? At 10x leverage, there is only a small margin for error. Naturally there is some risk. For BAC to go under now at this point, you would need to see another Depression...probably 20% unemployment. If that were to happen, then you better sell your Berkshire shares too, because they would be trading at a third of current prices. Because of the leverage, and the fact that BAC is still working on improving facets of their business and loan portfolio, we don't have a massive position. This is a 5% equity position and another 2.5% in warrants. This is where I am struggling - I can't determine the downside protection. It's not a matter of having the guts to buy something distressed, it's a matter of being able to determine what the downside is. That's where Yacktman's quote comes into play - how do you trust asset valuations that can be created with the stroke of a pen? I hate to "LVLT" this thread, but one could make the argument with LVLT that in a worst case liquidation scenario, the highly valuable "fat pipes" could be auctioned off for at least as much as the current TEV. I can't reliably make that determination with BAC - you can't tear apart its balance sheet and come up with a worst-case liquidation scenario that comes out favorably for equity holders. That's what I'm trying to get a feel for on this thread is how folks here are looking at the worst case scenario - what is the downside protection people are looking at? Simply saying "the Fed will just print" or "WEB bought a preferred stake" aren't valid margins of safety, IMO. There is in fact a scenario out there that another global credit crisis will impair the asset side of BAC's balance sheet and it will be forced to raise expensive equity - so the earning stream stays the same over the long-term, but the share count doubles, rendering the investment very if not permanently impaired. This line of thinking isn't Zero Hedge-derived either - it's being careful to avoid investing in the next WaMu, Fannie, Freddit, Bear, AIG, Merrill Lynch, etc... etc... That is the game! ;D That part of investing is the art. The science portion is the valuation, calculating margin of safety, tearing apart financials, notes and the MD&A. But managing and estimating the risk relative to the science is all art. The intangibles of the business and estimating management also fall into this category. Cheers!

I know that this comment I'm going to make is going to create a mess of this thread, but could it be that Prem and his team see some sort of synergy between RIMM and LVLT? What services or products/services could RIMM sell that would directly benefit them and LVLT? If you control the highway and you control the trucks (perhaps a better analogy would be shipping containers), that is a pretty big monopoly in distribution! Would love to hear ideas and comments. Cheers!

As Donald Yacktman says, banks can create assets with a stroke of a pen. The balance sheet still kills me.... How did everyone here involved in the Fairfax restructuring get comfortable with its balance sheet at the time? Was it more of a trust in Prem given how familiar you all are with him? Or is it just a matter of sucking it up and banking (no pun intended) on the earning power of BAC to allow it to earn its way out of this mess and assuming there are no major skeletons on the balance sheet? They were two very different investments for us. I was already a Fairfax shareholder when they had their problems, so I was completely familiar with the company's history, Prem, insurance, etc. In BAC's case, this was a completely new analysis. We were interested in financial institutions because they had been seriously battered, but I was not comfortable with BAC back in 2008. I was familiar with Wells at that time, and we bought a bunch of shares around $9. That allowed me to continue to explore financials during a period when many were restructuring through TARP, and generally when you have such periods of deleveraging, huge opportunities tend to sprout. BAC didn't garner my interest until 2011, when Brian Moynihan's changes started to become more obvious. He was not only talking the talking, but walking the walk and tearing this sucker apart. The system had become significantly more stable, loan portfolios of better quality, capital was cheap and housing had already gone through a significant correction. Much of the risks that made BAC a risky investment in 2008/2009 had now been significantly reduced, yet the stock was far cheaper than back then relative to earning power. The problem with buying with a margin of safety is that most people, even seasoned value investors, are fearful of making investments exactly when they should...margin of safety is high, but the market sentiment towards the investment treats it as extremely risky. Was BAC more risky in 2008/2009 when it was higher priced, or in August of 2011 when it was of lower price and much of the risk had been reduced? The answer is obvious, but unfortunately investors have a very difficult time wrapping their heads around an obvious concept because they are fearful. Another couple of examples: - Everyone thinks Fairfax is a fantastic investment today. But it really is only a good investment. While the underlying risks to the business are low, the market has valued it at a price that takes into account the lack of that risk. Six years ago, the underlying risks looked significantly higher, but the stock was actually trading at a signficant discount even after accounting for that risk. - We bought Steak'n Shake at a split-adjusted price of $80 when it was distressed, and no one wanted to touch it. We sold it some time ago once things had turned around and Sardar had started to implement his Biglari Holdings strategy. Our average sale price was about $380. Where is the stock price today? $380! And investors think it is a great investment now, while they bypassed distressed investments in financials over the last year. - We've recently acquired about 4% of a business that today is trading at about a tenth of its price from 5 years ago. The business has nothing but cash and we paid less than the cash per share price after all liabilities are paid, yet no one wants to buy this company right now even though it trades at 2/3rds of book. If I told you guys what company it was, you would tell me that there is business and execution risk, even though the business is now break-even and is growing. Five years ago, this was not a good business, even though it traded at a price nearly ten times higher. Today, it is completely liquid, growing and profitable, yet the market values it at ten times lower! So the simple answer is that by the time the average investor (and this is true for professionals, value investors, contrarians, you name it) becomes comfortable with a distressed business, the market would have already started to value it at a signficantly higher price and much of that risk would have dissipated. You are seeing it happen right now with BAC. By the time most investors decide to participate, it will already be at tangible book and it's Tier 1 capital will be over 10%! Well over double where it was four years ago, yet the price would be just a fraction of the 2007 price. This is the general behavior of the investor. Cheers!

Like everyone, I'm waiting for the Pacquiao/Mayweather fight. Would have been the biggest fight in the last 30 years if Pacquaio didn't look a bit vulnerable against Marquez. It will still be big. I'm a Mayweather fan...he's a douche, but a fantastic technical fighter. Amir Khan is a great technical fighter, but he's got a suspect chin. This kid Gary Russell Jr. looks like he may be a serious up and coming contender in featherweight. Boxers move up and down so much now in weight class, that he could be a threat in a couple of weight classes with the skills he has. In regards to Tyson, I remember watching his fight against Michael Spinks live on a big screen with my father like 24-25 years ago or so, and Spinks' knees were shaking in the corner before the fight began. Tyson was terrifying back then, not the shadow of the figure he became years later. He was actually a very good straight ahead fighter, and would walk right at you and duck just before you swung, and come up flying with uppercuts and body blows. That fight lasted like 80 seconds! He was a troubled person, criminal no less, but few fighters have cut such a figure in boxing. He was the size of Joe Frazier, but had the power of a young George Foreman. He was quicker than both in his prime when Gus Da Matto, his adoptive father/trainer, had him focused. Today, he's comic relief in movies, but back then there was no one boxers feared more than Tyson. And it truly was a legitimate fear at the time! Cheers!

I've watched boxing about as long as I've watched hockey, soccer, tennis and football. HBO has a terrific sports documentary called 24/7, which usually focuses on boxing, but has recently focused on hockey as well. Actor Liev Schreiber narrates, and 24/7 has won numerous awards over the years. They've just started a shorter six-part series on boxing trainer Freddie Roach, who was a fighter turned trainer, and has taught some of the best boxers in the last decade. Roach suffers from Parkinson's and the new six-part series focuses solely on him...arguably the greatest trainer in boxing history with the number of world champions he's coached in such a short span. This series actually has no narration, except for the occasional comments by Roach himself. The first episode was on tonight, and I have to say it's probably one of the most poignant sports documentaries I have ever seen. A brave, but sad undertone, to the distinguished career Roach has established in the world of boxing. A man who doesn't feel cheated, but actually fortunate to do what he does every day, and will continue as long as his body can hold out. Great documentary! Anyway, I thought I would give any members who enjoy sports a heads up. Cheers!

and mortgages is still the most important stress ahead. I have both but Citi seems to be on the fast lane and also very cheap. Thanks Eric, love your comments. I would be careful with Citi. Their exposure to Asian markets may (probably) will come back to haunt them. We own only BAC and WFC. As mentioned, I'm more confident in U.S. banks and the financial system than any other part of the world at the moment...including Canada! Our bet is on the U.S. coming back, while the rest of the world struggles. Cheers!

More sellers than buyers! ;D I suspect the ex-dividend date, along with capital moving from safer, hedged investments to undervalued, distressed investments. Cheers!

Article on treasury returns so far this year. Cheers! http://www.bloomberg.com/news/2012-01-20/treasuries-set-for-biggest-weekly-loss-in-a-month-before-home-sales-data.html

December sales numbers: http://www.cnbc.com/id/46070422 Cheers!

Looks like bondholders are close to taking a 70% haircut! Higher than I expected...50% is what I thought was fair. EU should legislate strong measures now against Greece and hold them up to strict fiscal measures for the next ten years! Cheers! http://www.cnbc.com/id/46064939

Article on Megabrands suit against Lego. Cheers! http://www.theglobeandmail.com/globe-investor/mega-brands-drops-lego-suit/article2309312/

Thanks ValueInv! Exactly what I was looking for. Looks like we are more than half way through and we should see some stabilization in the next 12 months, with an upturn in starts in 2013 based on demand and supply. Cheers!

Dr. George Athanassakos, who runs the Ben Graham Centre For Value Investing at the Richard Ivey School, has organized the 2012 Value Investing Conference for April 25, 2012, from noon to 6pm at the Board of Trade in Toronto. Speakers include David Winters, Mohnish Pabrai and the CEO's of MegaBrands, Resolute, Sandridge Energy & Kennedy Wilson. Works out perfectly for those attending our dinner from 6pm on! Details are at the link below: http://www.bengrahaminvesting.ca/Outreach/2012_conference.htm Program: http://www.bengrahaminvesting.ca/Outreach/Conference_Program.pdf Cheers!

Dr. George Athanassakos, who runs the Ben Graham Centre For Value Investing at the Richard Ivey School, has organized the 2012 Value Investing Conference for April 25, 2012, from noon to 6pm at the Board of Trade in Toronto. Speakers include David Winters, Mohnish Pabrai and the CEO's of MegaBrands, Resolute, Sandridge Energy & Kennedy Wilson. Works out perfectly for those attending our dinner from 6pm on! Details are at the link below: http://www.bengrahaminvesting.ca/Outreach/2012_conference.htm Program: http://www.bengrahaminvesting.ca/Outreach/Conference_Program.pdf Cheers!

I like both those exchanges Txlaw, and I feel very much in line with what was said about buybacks/capital ratios and the general strength of U.S. banks. I'm more comfortable owning U.S. banks presently, in particular large, national U.S. banks, than any other region in the world right now...more so than Canadian banks, more so than Asian banks and definitely more than European banks. Cheers!

The JP Morgan conference call indicated that there is a race to the top -- there were some comments made surrounding their wanting to get to fully phased in Basel III compliance sooner rather than later. It seems this is what they see as the measuring stick that separates the men from the boys. Then the Bank Of America release stated that they were "in line with peers" -- as if that's the end all and be all place to be. So I guess maybe it is. At least it's a lower risk strategy. Well, if the company won't buy more shares on your behalf perhaps you should fork over some of your own money. I think investors have to remember that things aren't completely rosy out there. If you have a significant event occur, banks as very leveraged institutions would be vulnerable. They could buy back shares with excess cash, but would that actually make the bank stronger and less impervious to such events? The answer is obviously no. So they really need to get to a level of capitalization where there is tremendous strength in the balance sheet, and then they can explore buying back shares or paying a dividend. But getting their capital ratios higher is the best thing to do. I don't think they need to sell any more shares. They could easily raise more cash by selling and then leasing back just their core offices in various cities, as well as selling other non-core businesses. The announced cuts, drops in loan servicing, and existing cash flows will be enough to reach Basel III compliance in the time-frame they have. Cheers!

Buffett was at a club in NYC last night chilling with Jay-Z! Some good pictures. Cheers! http://www.huffingtonpost.com/2012/01/19/warren-buffett-jay-z-diamond_n_1216458.html

Starts are at an all-time low: http://www.bloomberg.com/news/2012-01-19/u-s-housing-starts-fell-more-than-forecast-on-drop-in-multifamily-units.html Government getting close to a deal on 1M foreclosures. Are we getting near the bottom of the housing debacle? Anyone have the latest inventory numbers? Cheers!

I agree. We all know what a fortress balance sheet means in business, and it certainly makes a difference in a leveraged business like banking when things get rocky. When investors have no doubt about their capitalization, the stock will make its way above book like Wells Fargo. Until then, it trades at a discount. Building a bank that customers know will be one of the last ones standing makes a big difference over the long-term. They are half-way there now, where they are as well-capitalized as their peers, but taking that next step is where they need to go. Cheers!

Carol Loomis covers the debt donation: http://finance.fortune.cnn.com/2012/01/18/warren-buffett-scott-rigell-match/?section=magazines_fortune Cheers!

Yup! And existing cash flows are already enough to cover legal expenses and legacy loan losses. They've reduced exposure to Europe...so really their business will be determined by how the U.S. economy behaves and the housing market here. Cheers!

You are correct Eric. They are mutually exclusive. The $5B in cuts is coming from just normal operating cuts at various levels...nothing to do with the separate legacy costs associated with the loan portfolios. The $11B number would be correct, and you should see cuts on both ends showing up quarter after quarter. As I said...lean and mean! You will have a business focused solely on core banking, running efficiently, with a solid balance sheet and a constantly improving loan portfolio. They'll be smaller than JPM and WFC long-term, but run as efficiently and as strong...if not stronger. This will be one of the greatest turnarounds in the financial industry once Moynihan is done...he managed to save the Titantic! Cheers!

Good article in Forbes. Cheers! http://www.forbes.com/sites/toddwoody/2012/01/19/warren-buffetts-long-quest-to-build-a-geothermal-power-plant/?partner=yahootix

Article in Investopedia about Fairfax. Cheers! http://stocks.investopedia.com/stock-analysis/2012/Fairfax-Financial-No-Stone-Goes-Unturned-FFH.TO-BRK-A-L-MKL-A0119.aspx?partner=YahooSA#axzz1jwZhGycA

Flat, but better than last week. Cheers! http://www.bloomberg.com/news/2012-01-19/north-american-rail-freight-carloads-for-jan-14-table-.html?cmpid=yhoo