twacowfca

I live in a new town where 40% of the households own a golf cart which they drive on 100 miles of recreation paths to shopping centers, schools and for fun between the villages and the parks and lakesides. Kids are allowed to drive them before they are old enough to drive a car. That's good training because if a kid is going to do something stupid it's better to make a mistake at 15 to 20 mph than at 60 to 80 mph. When teenagers start to drive real cars, their accident rate is very low compared to most teenagers who haven't had that low speed training experience. However, the recreational paths are also popular for runners, walkers and bicyclists (c'est moi). Today, I biked through a tunnel on a path that opens up to a three way intersection where I sensed through the trees and bushes that two golf carts were approaching the 120 degree turns. I got over to the right side of the path because that intersection can be dangerous. A 17 year old kid approaching the intersection from my right wanted to beat the other golf cart to the turn, so he floored his accelerator and wheeled around the turn without seeing me as he whipped his cart to the extreme wrong side of the path where I was approaching on my racing bike. In a split second I hit the windshield of the golf cart and the cart won. The kid was in tears over what he had done, but, by the grace of God I walked away in one piece with no broken bones, praise God! Another day of adventure in our fun town. :)

Many thanks, Sanjeev. I appreciate all you do to keep this the best investing site by a country mile. Please don't ever grow weary in well doing. :) Frank et al.

It's way beyond being merely annoying, Sanjeev. I have clicked on the despicable ad more than once by mistake If there is no X or if I miss it. The ad covers about one third to one half the screen when the iphone is turned sideways, including translucent overlapping of what I'm trying to read. This causes even more false clicks when scrolling because it is nearly impossible to scroll without getting rid of the ad or inadvertently clicking on it. It's not like any other display ad I've ever seen. It's about 100 times more annoying. It looks like what one sees when there is a virus infection that affects the graphics. The ad seizes the working screen instead of being displayed at the bottom of the screen. If the strange graphics had not been confined to this site, I would have thought that my device had a virus. When the keyboard is also displayed, the x?&@x!x ad covers up all of the rest of the screen but two or three lines. If this were any other site, it would be history.

Thank you, Giofranchi. Tilson is a very good journalist of value investing. For some reason or reasons, often discussed on this board, he hasn't been able to produce good returns. His situation is reminiscent of the saying: "Those that do, do. Those that don't, teach."

Good thread. Lets count the systematic ways it's easy to lose in the market. 1) Buy high, sell low. 2) Trade frequently. 3) Follow the herd after it heads toward the cliff. 4) Buy things that have little or no intrinsic value or are priced higher than their thoughtfully considered intrinsic value. 5) Speculate without limiting the maximum possible loss to an acceptable amount. 6) Use leverage that isn't nonrecourse. 7) Buy things without understanding how their value is created or destroyed. 8) Trust managers who have not demonstrated trustworthiness. 9) Enter venues where people may be trampled in a panic. 10) Put all your eggs into one basket. 11) Buy a company in an industry that is being overtaken by technological change that will eventually destroy their profits. 12) Buy a high cost producer or a cyclical company near the top of the cycle. 13) Buy a highly leveraged company that doesn't have a great edge when interest rates are low. 14) Buy a company that doesn't have a good edge in a commoditized industry. Now someone else's turn. :)

Without reading the article, there is the phenomena called spooky action at a distance. Linked particles appear to "communicate" at faster than the speed of light in a mirror image fashion at the time the "spin" of one of the particles is measured. However, information outside of that closed system can't be communicated faster than the limit of light speed.

The first thing he did at BK was cut their HQ staff in half. Heinz departing CEO under pressure from Peltz didn't allow them to become so bloated. Maybe the new CEO will cut them only 40%. :)

The senior leadership of AIG's most successful P&C businesses have quit during this time of firming rates to form a new startup E&S insurer within Berkshire. The effect on AIG in the short run should be minimal, but the benefit to BRK long term is enormous: extension of what Ajit has wanted to do for a long time, roll up his sleeves and go after business in the Hurley Burley of the marketplace instead of sitting on the sidelines as an insurer of last resort. What we are seeing is the transformation of BRK's insurance business into what AIG was several years ago under Greenberg when when it was the most dynamic large insurer on the planet, minus all the dodgy stuff AIG got into in the last several years. This can only mean that very good things should happen in the future as BRK continues to grow its no cost float. :)

I'm sorry. You're talking apples ( a hypothetically extremely mispriced option) and I'm talking oranges (the aggregate market for buyers and sellers of options) Best wishes.

GrizzlyRock, I am sure you know this already, but Sardar suggests that you include the shares held by BH in any analysis and make the corresponding adjustments to GAAP accounting. Best, Ragu I once saw Mr.Biglari in the lobby of the Marriott at the BRK AGM. He was immaculately tailored in a very expensive suit and designer shoes. He was speaking with one of his shareholders who was telling him how he felt it was wrong for him to change the rules in the middle of the game and have his board give him this unprecedented compensation structure for a CEO. I was appalled at his lack of empathy and concern for the shareholder and how by body language, words and tone of voice he talked down disdainfully to the man, one of the owners of the company he worked for.

Based on this, how about on a $50 stock, you sell me $50 leap calls for a penny, and $50 leap puts for a penny. I'll be willing to play this game indefinitely as long as the stock continues to trade, just so that you don't have to worry about me getting lucky and winning the first time, and not having another shot at it. In reality, the long term profit is determined by the future volatility. If you're always selling options at implied volatilities that end up being higher than their actual volatility, you'll win. If the implied volatility turns out to be less than the real volatility, you'll lose. That's why you're unwilling to sell me those options for a penny -- the implied volatility of the options I'm hoping you'll sell me is too low for them to be profitable to you over the long term. Sorry, my explanation was wrong and incomplete. There is another important element in particular : time decay, not to mention interest rate, that means that steady sellers of options typically make some money even when the implied vol isn't necessary higher than the historical vol. What I had meant to say is that option sellers take on the volatility risk in exchange for a fee. In a more or less normal distribution, the price of the underlying will be (on average) average, regardless of its volatility in the meantime. In the long run, the changes in volatility will tend to cancel out (revert to the mean), and the system as a whole, composed of the sellers of options, will make money at the expense of the buyers of options just as the sellers of fire insurance (who provide an important service) will make money off the buyers. However, very selective buyers of options can sometimes make money, especially when implied vol is lower than historical vol because the distribution of stock prices isn't truly normal but subject to sudden changes, especially on the downside. Also, buyers of leaps (and sometimes short term calls) can make huge profits if they can predict correctly that a stock price will rise at more than a trivial rate. However, like gamblers in a casino who don't have an edge on average. Option buyers in aggregate lose money on making these predictions (as the sellers make money), and for the whole group, buying options is a negative sum game. :)

Thank you Tommm50, jEast and others for your helpful replies.

As someone who has done algorithmic trading in the past ( not to worry, I have successfully completed the 12 step traders anonymous program :) I have observed that one of the most successful niches is to trade off extremely negative keywords and phrases immediately when they appear on reputable news feeds. There is always at least a brief opportunity for profit even when a report later proves to be unfounded because the market becomes paralyzed. Productive keywords are terms such as bankruptcy, fraud CEO_____ dies, (immediate) terror/bombing attack. I suspect that alarming terms in the newsfeed(s) triggered initial sell orders without human intervention. If the false report had not been quickly squelched by AP, today could have been quite ugly.

I think Andy's comments on underwriting were for me the most interesting take out from the AGM. He said something about wanting the underwriting side of the business to be as well-regarded for excellence as the investment side. And that he expects underwriting results to be better....potentially significantly better. These weren't the exact words used, but I think are close. I take that to mean much more than just an over-the-cycle 100% CR. Then Andy asked a number of the individual insurance heads up, starting with Doug Libby at C&F who outlined how the business 5 years ago (or so) was 15% specialty and that now it's 85% specialty, which I interpret as less competitive and hopefully more profitable over a cycle. Unfortunately the rest of the insurance heads were not nearly as insightful, but my impression is that there's a plan in place to focus on more profitable over-the-cycle niches. Anyway, if Andy and his team manage to implement their plan there is enormous upside for the stock. As this was my first Fairfax AGM, I'm particularly interested in hearing from the 'old heads'. Is Fairfax prone to perpetually talking up their underwriting potential? Thanks Not at all in my opinion. They do emphasize underwriting as crucial to their long term success. Actions speak louder than words. The big improvement in their 10 year accident year CR's is impressive. When CR's can't be improved to meet their standards, they'll put a company or a line of business into runoff. It makes sense to take their 10 year accident year record as being representative of their underwriting going forward. :)

That's a great account that elucidates what I have been only generally aware of. I have mulled over in my mind the idea of a concept like "policy year" being more accurate than accident year because of possible lags and disconnections between receipt and recognition of premiums matching the months of coverage on policies. Can you explain more about the concept and how it helps remove possible distortions in reporting results? Why isn't this more accurate way of accounting reported? Interestingly, National Indemnity recently had an issue with Swiss Re similar to Fairfax's buying the TIG and C&F pigs in a poke several years ago. NICO was concerned about reserving issues on a seasoned life insurance book they bought from Swiss Re. They did a thorough analysis and found glaring reserve inadequacies. They had to file suit against Swiss Re to finally get an adjustment. I found that to be astonishing because Swiss Re had asked BRK to bail them out during the financial crisis. How's that for repaying BRK!

Good answer. Also life insurers are allowed to discount their future liabilities to pay claims many years in the future. In that sense, P&C insurers have potentially more conservative accounting.

You really did that?! WOW!! The fact this wonderful board is attended by such outstanding investors (the Superinvestors of the Corner of Berkshire and Fairfax!) is really a unique learning experience for the rest of us! :) giofranchi Prem is quite available and approachable around the time of the AGM. Ask him any question that isn't off limits, and he'll give you a straight answer. :) The insurer was Lancashire! You posted it on this board :) BeerBaron My question to Prem was phrased generally, not mentioning any company by name, simply to see if a great underwriter at a modest premium to book would be as attractive to him as a decent company at book or a not so good underwriter at a substantial discount to book. To the best of my knowledge my favorite smaller insurer isn't on the market, although management has periodically said they are willing to listen to attractive offers. I doubt the current market would support an offer they couldn't refuse.

You really did that?! WOW!! The fact this wonderful board is attended by such outstanding investors (the Superinvestors of the Corner of Berkshire and Fairfax!) is really a unique learning experience for the rest of us! :) giofranchi Prem is quite available and approachable around the time of the AGM. Ask him any question that isn't off limits, and he'll give you a straight answer. :)

Thank you original mungerville, wonderful post!! :) giofranchi Yes! Great post, Original Mungerville. With a focus especially on companies like Lancashire that are mostly free of income tax, I had overlooked the tax advantages of Fairfax acquiring insurance companies with lousy CR's for a price significantly below book value. Now Prem's focus is starting to make sense. A few years ago, I asked Prem privately if he might be interested in acquiring an outstanding property insurer with an awesome underwriting record at a modest premium to book ( instead of all the crappy companies he had a history of acquiring as I was thinking ). I was surprised at his lack of interest. Now, I understand better. With Andy Barnard and team it really does make sense to buy fixer uppers because they generally can eventually get them fixed, and in the meantime their tax bill is lower. ps ap1234 The reason for the difference between the CR's and the accident year CR's has to do with things like A&E liability. That's the gift that keeps on giving. -- One of the occult hazards that may be present when buying crappy companies that could have mystery meat in their freezer.

I can't speak for Sanjeev, but there is a general answer to your question. Buying options is usually a losing game like playing the horses. The transaction costs, especially the difference between the bid and the ask, will attrit your capital if you don't have a big edge. Playing the earnings release game with short term options is a crowded field. You will lose big time if you don't have insights. One way to get an edge is to understand a company extremely well, especially a company that doesn't give guidance and isn't followed by a flock of analysts. Then, only trade on those rare occasions when you know something big will happen and Mr. Market doesn't. How do you know what Mr. Market is thinking? Again, that comes from studying not just the company, but Mr. Market's perception of that company over time. Another way to make money with options is to understand what drives the profitability of a company over time and rarely, when there is a row of green lights ahead that Mr. Market can't see, buy leaps if they are attractively priced. Leaps are typically more likely to be dramatically mispriced than short term options. There is another reason to be very selective when buying options: it's a negative sum game for the buyers and a positive sum game for the sellers. Why is this so? The sellers make money on average because they are selling volatility, and volatility always regresses to the mean until there is an end of the world event, something that kills the whole system. Therefore, in a functional system, the buyers of options lose money on average for every trade in addition to the frictional or transactional costs. Therefore, option buyers, like parimutuel bettors on a horse race that have to overcome the rakeoff on every race, must be very selective and only bet when they have an objective and substantial edge over Mr. Market.

I don't do anything fancy like many people. I view options in the same way I view the stock, but I weight the time arbitrage risk against the possible reward from the market mispricing. The only way to do this is to run through the events that could affect the stock by understanding the psychological aspect of investing. What is the impact of the quarterly report being poor, and how much do I lose? What is the impact of the quarterly report being about the same as past years, and what is the possible upside? What if the quarterly report is very good, how would the market reaction be and how much would the stock rise relative to intrinsic value? What is the ratio between loss of capital and the upside? If this report is not good, how much time would the company require to improve performance? Etc, etc. This tends to work best with companies where there is a significant short position and tighter liquidity. Companies that have more than adequate short-term capacity to cover their debt maturities. Also, businesses where you have some aptitude for the industry, how it operates, the business cycles, misinterpretation of data, etc. I think we've made money on about 60% of our option bets over the years...a little less than equities which is around 65-70%. We also tend to bet big on the good ideas...1-2% of the fund...and usually never more than 4-5% of the fund in options. The shorter duration the bet, the less we put in generally. While we would never have more than 4-5% invested in options at cost, an idea can easily grow to be more than that. For example, our options on Steak'n Shake at one point grew to almost 18% of the fund from a 3% position...we kept paring it back and it kept growing...over about a year. This Overstock bet and the Bank of America bet we did a little while ago, both went over 5%, even though we only put 1.5% and 1% of capital into each idea respectively. But I've never made that much money in such a short time span. It's just the way it goes sometimes as the market rationalizes something. Plenty of analysis, but a bit of luck in it too with the time arbitrage! You just try and make good calculated bets. I can't remember where I read it, whether it was Tim telling me, or I read it in Peter Cundill's book, but the one thing Cundill did that was very impressive was that he always found different ways to make money. We're inundated with the culture of value investing a la Buffett...good businesses with competitive advantages...but Buffett over his life has always made money not by sticking to a single philosophy, but by finding irrational and mispriced assets, regardless of anything else. It's why so many say Buffett contradicts himself. It's not double-speak as some like Doug Kass allude to at times, but that Buffett understands his ability to exploit inefficiencies. He also understands that most people cannot do it. It's also the foundation of Ben Graham's philosophy...buy when irrationality and inefficiencies exist and you have some margin of safety. It's why Buffett makes the index swaps bet, or the negative coupon Berkshire bonds, or Blue-chip Stamps which led to everything else. He looks to exploit irrational behavior. Prem does this too but won't admit it...credit default swaps, deflation hedges, RIMM, etc. I think you have very good examples of people on here that can do that as well. Not everyone, but you do have a handful of people who are very good at it. Ericopoly is on one extreme. He found huge inefficiencies he exploited with gigantic amounts of leverage and concentration. It took a great deal of analysis, alot of luck on the time arbitrage, and dinosaur-sized balls! But as you can see from Eric's posts, he spends an inordinate amount of time focusing on risk control and market psychology. He's got both the science and art side of investing going, and he's got the perfect temperament to handle the leverage and concentration. So that is how we view options...the same as equities, but constantly recalculating the time arbitrage risks and how the market might behave. Cheers! That's a lot of great insight, Sanjeev. Let me pick out and emphasize one of the most important of your observations that can lead to huge gains. That's a large short interest. The short sellers, like 'em or hate 'em, are generally right, at least in the short term. But when they are wrong, taking the other side of their trade can capture a huge reversal when short covering kicks in. Think Fairfax a few years ago or Overstock now. :)

I can't speak for Sanjeev, but there is a general answer to your question. Buying options is usually a losing game like playing the horses. The transaction costs, especially the difference between the bid and the ask, will attrit your capital if you don't have a big edge. Playing the earnings release game with short term options is a crowded field. You will lose big time if you don't have insights. One way to get an edge is to understand a company extremely well, especially a company that doesn't give guidance and isn't followed by a flock of analysts. Then, only trade on those rare occasions when you know something big will happen and Mr. Market doesn't. How do you know what Mr. Market is thinking? Again, that comes from studying not just the company, but Mr. Market's perception of that company over time. Another way to make money with options is to understand what drives the profitability of a company over time and rarely, when there is a row of green lights ahead that Mr. Market can't see, buy leaps if they are attractively priced. Leaps are typically more likely to be dramatically mispriced than short term options. There is another reason to be very selective when buying options: it's a negative sum game for the buyers and a positive sum game for the sellers. Why is this so? The sellers make money on average because they are selling volatility, and volatility always regresses to the mean until there is an end of the world event, something that kills the whole system. Therefore, in a functional system, the buyers of options lose money on average for every trade in addition to the frictional or transactional costs. Therefore, option buyers, like parimutuel bettors on a horse race that have to overcome the rakeoff on every race, must be very selective and only bet when they have an objective and substantial edge over Mr. Market.

News media report the capture of the surviving one of two video taped suspects in the Boston Marathon bombing.

I always buy before the bottom and need to watch it drop like a rock, then I always sell too soon and need to watch the price of what I no longer own skyrocket. If that was really the secret, I should be a billionaire by now. If you will read Baron Rothschild's statement carefully, you may discover that your buying strategy is the opposite of his. The fact that he never bought at the bottom means that he never bought on the way down. Had he done so, occasionally he would have bought at the bottom when such a purchase coincidentally could have been at what after the fact proved to be the bottom. Therefore, Rothschild certainly avoided falling knives and only bought after a substantial decline had stabilized and a stock had risen off the bottom. :) So rather buying something that is sufficiently undervalued as to have a reasonable margin of safety (even if it doesn't turn out to be the bottom), I should learn to time the market better? :) All kidding aside, I get your point. I tend to buy on the way down rather than on the way up and that is probably a mistake. That's the way Rothschild did it, his secret of success. That's only one way. Buffett does it differently, but only with a great margin of safety when he knows the intrinsic value of a company. In 1973 - 1974 he bought Washington Post (and other bargains) for one fourth its private market value (the most objective way to determine intrinsic value), then saw it continue to tank after he was tapped out. He had put most of NICO's assets in common stocks that sank way underwater, but he didn't sweat much because insurance companies didn't have to mark their common stock holdings to market then. It wouldn't have been practical for its regulator to have seized and liquidated NICO when it had almost entirely equity assets on its balance sheet even if the regulator had been inclined to do so because many other insurance companies were in worse straits.

I always buy before the bottom and need to watch it drop like a rock, then I always sell too soon and need to watch the price of what I no longer own skyrocket. If that was really the secret, I should be a billionaire by now. If you will read Baron Rothschild's statement carefully, you may discover that your buying strategy is the opposite of his. The fact that he never bought at the bottom means that he never bought on the way down. Had he done so, occasionally he would have bought at the low point when such a purchase coincidentally could have been at what after the fact proved to be the bottom. Therefore, Rothschild certainly avoided falling knives and only bought after a substantial decline had stabilized and a stock had risen off the bottom. :)