twacowfca

La la lalalalalalala la la la . . .

In the last couple of weeks we've been buying more cash and more index puts. Not much upside if the market goes up. but our portfolio could actually increase in value if the market takes a dive because of the quality of our main holdings. :)

I think this is why the politicians are so desperate to take the GSEs out of the public shareholder's hands. The cash flows for them to play with (spend) will be enormous going forward. I think the UST is boxed in on this. Taking over F&F would inflate the government's balance sheet like a hot air balloon. Ultimately, they will have to face the unpleasant fact that they have hogged all the profits to a degree far beyond what it cost to bail them out. Here are government sponsored enterprises where the preferred shareholders included many pension funds and small banks that were allowed to own the preferred by their government regulators only because the government deemed the preferred to be super safe. Once the government is made whole on their bailout funds, are the small banks and others who relied on the assurances of their government going to be wiped out while shareholders in private companies like TBTF banks and insurance companies like AIG continue to make a substantial recovery in their losses!? That would be the unkindest cut of all: recovery of shareholders of the TBTF banks that almost brought the country to its knees with their greed and bloated bonuses for their managers while the pension funds and regulated small banks have all their equity taken by the government as a consequence of the excesses of the managers of the GSE's.

The answer is no, and that's only because he put a higher price tag on A. If you knew for certain there's no high inflationary years ahead, it makes sense to go with B- your annual return is plainly higher Or is it? Considering the cost of capital (8%? 9%?) for a small company, A is the clear choice, ceteris paribus, given the information supplied. Interestingly, A would likely have a lower cost of capital than B because of its superior economics. A Bayesian analysis with weighted probabilities for various stress tests, including inflation, would almost certainly show A to be more anti fragile, assuming that the two companies are comparable, except for the superior economics of A, compared to B. :)

Open a pearl in an oyster stand in NYC near Central Park. Then, New Yorkers won't have to go all the way to Hawaii to find a pearl in an oyster!

Yes, the SEC has them. :) They provided a key breakthrough for the SEC in their investigation of Mr. Big Fish.

Those authors have resonated with me. I haven't read Soros first book. Is it better than his other two? His theory of reflexivity has seemed to me merely seeing through a glass darkly what Mandelbrot saw much more clearly through his fractal math. Can you summarize his Alchemy of Finance?

I zipped Laura an email a few weeks ago to what I thought was an active account but haven't heard from her. Ask her if she will please read Richard Brindle's Lancashire Holdings letters on their website and tell us how they compare to Buffett's. Thank you.

Go Bruce Berkowitz! Making the case very eloquently. I hope he gains traction. Yes, welcome to the party, Bruce. Sorry, you declined my invitation to join USG's coming back party ten years ago, but this could make up for that lost opportunity. :)

What other notion of market risk is there? It's pretty standard that risk is defined as a dispersion of returns. Various factor based approaches where beta, size, book/price, momentum, etc all become risk measures. The interpretation is largely a bunch of poppycock but not uncommon in academia. Also, there are other measures like volatility. Semi-variance, etc. And combos like the Sharpe ratio. Good luck / skill to everyone on the exam this year. I'm glad I don't have to write exams these days. ;D Norm, would it be heresy to shift focus on the CFA exam to concepts like Ziemba's modified Sharpe ratio that is more representative of down risk/volatity than a ratio based on a normal distribution?

All the best. Happy birthday, Tim. :)

Like Chanticleer, I must conclude that Mr. Market has taken my advice to sell the F&F common to arbitrage the difference in prospective value of the F&F preferred. The common has lost half its market value in the last couple of days while the preferred has been flattish. Should I try for making the sun rise? :)

.02 - nice! My buys averaged .035. I agree. The (dramatic) return to financial health was condition 1 of 2 for these to see an actual return. Condition 2 is a restructuring that recognizes that fact and recognizes the legal position of the preferred holders. Since we now have one of these two conditions in place, it is perfectly rational that the price has rallied. And the incentives should be aligned for condition 2. The froth just tells me that the rally may have overshot a bit - for now... Nevertheless, I decided I will hang on to the the ~1/3 of my shares that weren't bought yesterday, and still hope to buy more if the price is right. Back then the pricing of the F&F prefs was all over the place. Some traded at 1% of stated value, others at 2% or more. The more liquid prefs often were twice as pricey as the least liquid. When a holder was selling a particular issue, the price could drop 20% or more. We had to creep into them by waiting until some significant holder was selling because market makers had stopped making markets in those illiquid issues that Mr. Market thought were almost certainly worthless. No funds were accumulating any of the prefs. We were buying 1/3 to 1/2 the shares that erratically traded, usually the issues that seemed to be greater bargains and sometimes others when big blocks were offered (measured by number of shares). We could usually buy blocks at a large discount to the recent price range of that issue. It was a buyers dream like when we were buying a large percentage of The shares of USG that traded in 2001 after they went into Cpt 11. :)

Hmmm. Have stocks reached a "permanently higher level"?

Kind of agree. We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold. At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue. The preferreds were so illiquid then that it took us a couple of months to build a significant position. The big thing that has changed now is the financial health of their business. Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures. Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago. Nevertheless, these are not something to bet the farm on. :)

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa! Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend. By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred. My mistake was to anticipate waiting until the end of the year before building up our position once again. By then, the preferred had already rebounded and recovered most of the selloff loss. I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1 before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :) Having said all that, the outcome is entirely dependent on politics inside the beltway. :o Indeed, politics makes this an impossible forecast. I bought two years ago and the position has almost tripled. But it's been a bumpy ride as I was down 75% at one point right after the 2012 amendments when Kyle Bass and others bailed. I'm always glad to have someone make a public case for the thesis, but I wish it was anyone but Ralph Nader. The only group that loathes Nader more than the Republicans is the Democrats (they blame him for Bush vs. Gore in 2000). Politicians are spiteful and have long memories! I'm so glad to hear that you held on to them then. I thought you had sold out. That was one reason I didn't flog my bull case then; I didn't want to rub salt into an open wound. Also happily, I checked our records and found that we had in fact bought a substantial mount of F&F preferred last summer after the big blowup, contrary to what I said, although not nearly as much as we should have bought. :) Some of these are up as much as 600%. :)

True that. The longer it takes the better but I was hoping for a more supportive Obama administration. The GSEs should have had an end similar to AIG's. http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/millstein's-plan-for-fannie-and-freddie/msg77842/#msg77842 What happened to AIG and the TBTF banks is the most powerful argument for the eventual return of substantial value to F&F, especially the preferred holders. Imagine sometime in the not too distant future when F&F have returned in some way more than the government put into them. Here are those GSE securities that the US advised the small commercial banks were the only high yield preferred that it was safe enough for them to hold as capital. And then all the TBTF banks plus AIG shareholders have had a substantial recovery, while the small commercial banks that have had to bear a disproportional burden to replenish the FDIC deposit insurance fund, have got zippo from the very GSE security that their regulator told them was safe to hold. What kind of justice is that?

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa! Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend. By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred. My mistake was to anticipate waiting until the end of the year before building up our position once again. By then, the preferred had already rebounded and recovered most of the selloff loss. I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1 before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :) Having said all that, the outcome is entirely dependent on politics inside the beltway. :o

There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market? One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain. The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium. I hate to short, but the arbitrage is compelling for those who do. :)

Good post. The main problem with schooling is that it is all too infrequently truly educational. Our government in the US has the bad habit of spotting a good thing and then ruining it by throwing too much money at it. Someone recently published a statistic that recent college graduates with BA degrees earn about $20,000 less on average in their first jobs than recent graduates of trade schools. The emphasis on schooling in our culture prolongs childhood status beyond the late teenage years, often into the 30's. Household formation is delayed and this sad situation is exacerbated by tuition debts, leading to a birth dearth among young adults who own a piece of paper to prove that they can pass often dumbed down tests by regurgitating or cut and pasting pat answers. These comments are made by one who grew up in an extended family with many teachers where true education was prized. These remarks are not intended to disparage the best aspects of modern education involving motivated students and dedicated teachers. However, the best model for true education may be facilitating the Zen Master idea, as Giofranchi is doing, that when the student is ready, the teacher will appear.

Yup, but eventually the increase in money will work its way through the financial system as those other factors normalize or regress to their means.

Yup, when asked at the AGM what is BRK's long term competitive advantage, both Warren and Charlie answered enthusiastically that it was BRK's culture and stated policy of providing a secure home for businesses whose owners wouldn't want their prized horses sold to the highest bidder who might mistreat them and when there was nothing left to give, send them to the glue factory.

It's not odd at all. Canucks are notorious for trying to run contraband maple syrup across the lake in their fast cigarette boats. Besides, the treaty about demilitarization of the border was obviously intended to work only one way: no Canadian militarization at the border. Actually, this may be a case like solving the mystery of where to reinforce the armor of US bombers that returned to base badly shot up during WWII. Reinforce them in the places that were shot full of holes, obviously. Or wait a minute, a physicist said, wouldn't it be better to reinforce the armor of bombers that made it back to base in the places where they were not shot full of holes?

Doubling the money supply over time will cut the value of each unit of currency in half as the increase works it's way through the system first through inflation of financial assets and then through other prices. Actually, prices won't quite double, because there will probably be some increase in productivity while the increase in the money supply worked its way through the system. The effect on other prices is muted now because most of the world is recovering from a supercycle. Eventually, few if any countries will gain advantage from these moves to devaluation, but the whole system will see debtors relieved of half of their payment burden in real terms, and debt holders in aggregate will find that the real value of what they hold is worth half as much. Holders of short term debt will be able to sail on that sea in calmer waters than holders of long term debt, but will never the less find that the real value of their holdings is cut in half. Holders of long term debt will take the biggest hit as rates eventually increase to compensate for loss in purchasing power. Equity holders will find themselves in the stormiest seas, but eventually see their coupons reset to a higher nominal rate to compensate for their real loss in purchasing power. :) :)

I'm very glad to hear that you are on the mend. :)