twacowfca

That's a good way to have good above average returns and steady income with little downside, occasionally having to buy a good company at a bargain price. How did you do in the 2008 2009 market meltdown, if I may ask? What are your cumulative or average annual returns from 2007 thru 2012? The percentage I am in cash, and the number of potential positions because of being short puts, does vary. But I have been doing some form of this over the time period you ask about. Here are my returns for recent years 2007 22% 2008 -5% 2009 13.7% 2010 17% 2011 5.4% 2012 18.3% Those are very good returns! They are even more impressive when adjusted for volatility. Congratulations! :)

The trade is very asymmetric, skewed to the upside when the stock is close to or at the repurchase limit. Time decay makes short term options especially more risky the more above that limit the stock is. Leaps, particularly deep ITM Leaps, are relatively less risky than other calls, especially when the stock is significantly above the repurchase limit. I too like Leaps for this trade: however why deep ITM? I would think the time horizon of the Leaps are adequate for managing the risk that the stock takes longer to rebound. I would think ATM or slightly OTM Leaps would provide more leverage on the upside while the one-two year time provides a cushion to protect the downside. They are more prone to systematic risk I suppose. What are your thoughts? When the stock is significantly above the repurchase limit, there is much more time decay risk because the stock could become range bound with the lower limit below the price of the stock at the time of purchase of short term calls that are especially subject to time decay If, on the other hand short term calls were bought when the stock was at or near the repurchase limit, the likely lower bound would be very tight. Thus any significant volatility would likely be up volatility, exactly what is wanted after buying a short term call. There is much more risk if a short term call is bought when the stock is above the repurchase limit because volatility over a short time period could be downside vol as well as up vol. ITM calls or Leaps will be much more forgiving of a little (say 5%) downside vol in that circumstance. With a little downside vol they might only lose a little value or live to fight another day while short term ATM or OTM calls could be wiped out. That's why we will likely be rolling our short term calls to Leaps now that the stock is significantly above the repurchase limit. :) One analyst has BRK ranked #1 or #2 of all the stocks in the S&P500. Long term holders who wanted to sell to avoid tax increases did so before the new year. BRK has lots of upside potential if the market isn't bearish. :)

The trade is very asymmetric, skewed to the upside when the stock is close to or at the repurchase limit. Time decay makes especially short term options more risky the higher above that threshold the stock is. Leaps, particularly deep ITM Leaps, are relatively less risky than other calls, especially when the stock is significantly above the repurchase limit.

That's a good way to have good above average returns and steady income with little downside, occasionally having to buy a good company at a bargain price. How did you do in the 2008 2009 market meltdown, if I may ask? What are your cumulative or average annual returns from 2007 thru 2012?

The evidence would be the methodology used in particular studies. Most studies of the small cap effect take various deciles or quintiles of stocks by market cap, track the performance of each group for a year and then rebalance. Obviously, the smallest cap(s) by decile include a number of beaten down companies, especially after the market has taken a dive. The rebound in that case can be huge. Select Comfort got beaten down in the last market meltdown to the point that it was a microcap and then bounced 20 or 30 times above it's low. Same with Crocs and many others. I can't give a citation, but I think there has been at least one study that tracked all the stocks in various market cap deciles, including those that went out of business, in rolling multi year periods. I think there is still a small cap effect in general, although much less than in the studies that rebalance yearly. Most of the small cap effect appears merely to be regression to the mean. On another thread, I showed how to get dramatic outperformance in a volatile, but ultimately flat market simply by making purchases and sales and then rebalancing to a 50% cash position as the market rises and falls. Essentially, this means buying when a flat, trendless market has smaller capitalization and selling when the market has higher capitalization. There have been long periods when the market hasn't been bullish that small caps have under performed.

Here's an update on the trade. First, the trade is in addition to our large position in the common, large because of the huge MOS. In the first half of 2012, we added OTM Leaps when the stock price at the end of the quarter was about what we estimated 110% of BV would be once the quarter's results were reported. These are now up about 67%. In mid December, we bought deeply ITM Leaps when the stock price was at the then announced increase in the repurchase limit of 120% of BV. These are now up 12% to 14%, about double the increase in the stock itself since we bought them. At the end of December, we bought a lot of slightly OTM Jan and Feb calls, as the stock price was not only below 120% of BV, but even more below what we estimated 120% of EOY BV would be. :) Recently, we've sold about half of these as they're nearing expiration for gains of 3 to 4 times what we paid. The remainder we will probably roll over to Leaps as they near expiration. What we are doing is an old hedge fund technique of identifying a trade that is almost a sure thing and then levering up. However, unlike most hedge funds, we lever up with non recourse leverage. :)

Sorry. Unable to take survey because we don't target a particular"style". One place we rarely go is micro cap, not because that is beneath us, but because it can be illiquid, and sizeable perks for managers or control shareholders could nullify the ability of minority shareholders to participate in the success of the company. Larger companies are more transparent, and occasionally we can find a great company with a CEO who has a lot of equity or quasi equity who puts minority shareholders pari passu or even ahead of the CEO (think Buffett). :) There is an exception, however. Occasionally, an OK larger company gets knocked down drastically in price. Then, it is classified as a small cap or micro cap. This is often a good fishing hole. Interestingly, a large part of the "small cap effect" is actually some of these larger companies rebounding after they have been beaten down. :)

I think a good statistician like Nate Silver would suggest that they mistake the noise for the signal.

If one will run BRK and LRE through these screens, I think the results will be pleasing. Taking LRE's ratios back through six years and three quarters, rather than three years, should be even more pleasing. :)

Thank you for posting. Felix one of the very best for macro trends worldwide. :)

A company can change a policy whenever it wants, but why would they want to change this one? There might be some short term advantage in "passing a bad penny to another", as Lord Keynes said, but why would a company that is unique in having built a reputation for being a buyer and then a loving owner of a dairy herd of prized milk cows turn "old bossie" into cat food as soon as soon as she begins to give less milk?

Nicely done. No leverage either. The day I was buying equity for the funds, I was buying equity only for my personal account. Never bought more again for any of them, as the price never hit our bid and BAC has risen ever since! I've done this three times before...BRKB's in 1999/2000, FFH, SNS and now BAC...I'm looking forward to the fifth time whenever that appears! ;D Cheers! Sanjeev, Looks like you may have bought at the same time we did( the day after BAC closed below $5.00) with our unfortunately micro sized position. Congratulations for going all in at just the right time. Awesome!

The $1.4B for Sandy losses looks about right. That's a lot more realistic than some other estimates. What's Dowling allowing for index derivatives changes? I agree that the recent bounce and resulting updraft may make the 120% of book floor less important. :)

Your way of analyzing the entire capital structure of companies is very interesting. Curious if you posted at all about the pricing of the capital structure of banks and financials in 2008-2010. I am sure there were some discrepancies there and it seems like your investing style may have picked up on a few. Packer, you're in good company. This is the way Warren frequently invests when there is some risk a company might not survive. jay21, That's how Warren invested in BAC as opposed to buying pure common stock as he did when the MOS was greater with WFC. In retrospect, that extra protection may not have been necessary with the TBTF banks. They weren't in Cpt. 11, but think of the worst of the TBTF banks a few years ago as if they were with the US as their trustee. Hypothetically, the common could then be viewed as the fulcrum security on the bubble for survival after taking a haircut.

Awesome Twa, great decision! I'm in the 70 strike Jan 14 LEAPS and happy too. They are up 16% and plus they have already "paid for" almost half of the initial time value cost through decay. How do you interpret BV as it applies to company repurchases? Is it BV as published at the end of the most recent reporting period, or is it BV as estimated internally by WEB on the day of a repurchase? I'm very glad for you that the trade has worked well. In 2011, immediately after Warren made his first repurchase announcement, it was clear that the limit for repurchase was based on the last reported quarterly BV. Every time the stock went below that level there was increased volume, and the stock quickly popped back up above that limit. Then, within a short time, BRK actually reported repurchases when they published the next quarter's results. During the following several months, BRK's price rarely got down to the repurchase threshold, and never significantly below it as calculated by the latest public quarterly filing. There were, however one or two times when BRK got below what I estimated the quarterly repurchase value was at the end of the calendar quarter, but before they actually reported. In summary, I have seen no evidence that BRK has made any repurchases based on what an instantaneous estimate would be before that value was officially reported. However, there did seem to be a possible adjustment in how close to the previous quarter's limit they will go when the market was weak as it was after Christmas until the EOY bounce began. Formerly, BRK repurchased aggressively when the stock got no more than half a percent below the limit established by the previous quarter's reported results. However, at the end of December when the market was weak on the verge of the feared fiscal cliff, the buying activity at first kicked in as usual at less than half a percent below the limit, and the stock quickly popped back up above the limit as it had in the past. A few days later, as the market was even weaker, the buying activity kicked in strongly after the stock dropped to a range between one and two percent below the previous quarter's limit. BRK may have bought back more shares this time than in the past by making most of their repurchases a little below the limit instead of almost exactly at the limit. That is assuming that a lot of the buying just below the repurchase limit was by BRK as I suspect. We should know if this was the case when BRK reports EOY results. :) Thanks Twa you are very generous to share your observations. Your short term options have worked out temendously. With admiration, I looked back on the details at the time of execution. For example on Dec 31: Underlying BRK B share price .............. 88.25 120% of last reported BV, "floor".......... 89.35 Strike of Feb 15 '13 call option ............ 90.00 Price of Feb 15 '13 call option ............... 1.25 With the next reported BV date after the option expiration date, the "floor" price was sure to remain under the strike price. Were you expecting to hold these option to maturity, or were you expecting a higher price on the option from a quick move of the underlying up to the floor of 89.35? We continue to hold most of the options we bought. We may roll the short dated ones into leaps as they near expiration. This is what we did in 06 with the big coup with FFH. However, I don't expect BRK to go up nearly as much as FFH did then. ) The model for my expectations is not merely the very limited experience we have had with BRK buying its own shares below a preset limit, but the additional data points from a very similar transaction in 2006 when BRK repeatedly bought USG after their rights offering and snuffed out the short attack by our same "friends" who tried to drive Fairfax into the ground around the same time. The following is all part of the public record. USG's price rose way above its IV in 2006 after its POR was announced. As part of the POR, BRK agreed to backstop their huge rights offering at $40/SH. When the rights were issued, the shorts drove USG's price down from $120/SH to a little above $40/SH, the price BRK had agreed to backstop the rights offering. USG's price did not reach the backstop level, and their recapitalization was completed. Not long afterward, the shorts or other holders of the expanded share base sold down USG to $45/SH. When the price dropped below $45, BRK bought USG aggressively,and the stock popped back up above $45. The next time the stock approached $45, we bought it too. A few months earlier,we had sold 99% of our very large USG position between $65/SH and it's peak of $120/SH after their POR had been announced. There were three or four times afterward when USG approached what appeared to be a repurchase level at $45/SH. (this was not announced, but what BRK was doing was transparent because they had to report their purchases within three days as insiders). USG's stock bounced a little bit above $45 when BRK made their first purchases below that level. Then, USG's price would tend to rise higher after subsequent purchases as Mr. Market caught on. It appeared that the bounces were higher after BRK was able to make significant repurchases below that threshold than when they weren't able to buy as much. We did not want to hold USG because the housing market had reached its cyclical peak, so we got in a pattern of selling above $50/SH and then buying the next time it got down to $45/SH. Therefore, we are now hopeful that with substantial buying of BRK below last quarter's limit, the price may rise significantly above the old and then the new repurchase limit. :) Time will tell.

Bruce B. and many on the board weren't wrong, just early. I popped my head into the party, grabbed a snack and then left before all the fun began. :)

Mille grazie! You are very kind in your remarks. The pleasure is mine. I have thoroughly enjoyed making discoveries and sharing them with others who may appreciate them since I was 18 months old. The positive feedback from you and others on the board makes it all worthwhile. :)

No, I never use words like "information arbitrage" -- too big for me. I would be the guy just telling the interviewer that I merely cheated off of the smarter kids in the classroom. That's not a bad methodology. It's what I've used very successfully after some of the better purchases Warren has made have tanked. It seems also to work through the wisdom of the knowledgeable crowd here on the board, keeping in mind that smart people can herd as well as cattle. The secret may be in deciding if or when to join the herd. BAC at $10? $8 $7 $6 or $5. Or on the way back up at $6 $7 $8 $9 $10 or ??? :)

Awesome Twa, great decision! I'm in the 70 strike Jan 14 LEAPS and happy too. They are up 16% and plus they have already "paid for" almost half of the initial time value cost through decay. How do you interpret BV as it applies to company repurchases? Is it BV as published at the end of the most recent reporting period, or is it BV as estimated internally by WEB on the day of a repurchase? I'm very glad for you that the trade has worked well. In 2011, immediately after Warren made his first repurchase announcement, it was clear that the limit for repurchase was based on the last reported quarterly BV. Every time the stock went below that level there was increased volume, and the stock quickly popped back up above that limit. Then, within a short time, BRK actually reported repurchases when they published the next quarter's results. During the following several months, BRK's price rarely got down to the repurchase threshold, and never significantly below it as calculated by the latest public quarterly filing. There were, however one or two times when BRK got below what I estimated the quarterly repurchase value was at the end of the calendar quarter, but before they actually reported. In summary, I have seen no evidence that BRK has made any repurchases based on what an instantaneous estimate would be before that value was officially reported. However, there did seem to be a possible adjustment in how close to the previous quarter's limit they will go when the market was weak as it was after Christmas until the EOY bounce began. Formerly, BRK repurchased aggressively when the stock got no more than half a percent below the limit established by the previous quarter's reported results. However, at the end of December when the market was weak on the verge of the feared fiscal cliff, the buying activity at first kicked in as usual at less than half a percent below the limit, and the stock quickly popped back up above the limit as it had in the past. A few days later, as the market was even weaker, the buying activity kicked in strongly after the stock dropped to a range between one and two percent below the previous quarter's limit. BRK may have bought back more shares this time than in the past by making most of their repurchases a little below the limit instead of almost exactly at the limit. That is assuming that a lot of the buying just below the repurchase limit was by BRK as I suspect. We should know if this was the case when BRK reports EOY results. :)

Just an update. Around EOY 2012 BRK dropped below The new 120% of BV repurchase limit to as low as $88 and change. This was more than 2% below what we estimated 120% of EOY BV would be. Therefore we backed up the truck and bought short term $90 strike Jan and Feb calls to goose the returns beyond the common and LEAPS we already owned. This, of course, was speculative, but the risk/reward appeared to be very asymmetric in our favor. The risk/reward was especially favorable because the implied volatility of these calls was modest, unlike the astronomical implied vol on the BAC warrants we bought in the unfortunately micro position sized purchase last year at the same time. This time the BRK calls were most definitely not a micro position. :) Happily, these short term calls are now three to five times what we paid for them. :)

so, I was thinking about this some more (it was bothering me as I expected general outperformance from the board)--the graph is deceiving. It looks like a normal distribution, but the y-axis (in this case) is not linear, it is <0, 0-10 (gap of 10), 10-25 (gap of 15), 25-50 (gap of 25), 50+ (gap of 25), so I bet the underlying data are not centered around the S&P TR, but a bit above it. Admittedly it is a poorly done poll indeed. I did this because I didn't realize that it was possible to add more than 5 choices, but I see by your compounding poll that it is possible. I thought I was limited to 5 categories and I wanted to capture negative returns as well as really high returns. This left only 3 categories to work with in the middle. I broke them up best I could. Had I known I could create more options I would have done a much finer granularity. These types of polls are not scientific anyway. They are self selected in at least two ways. One is that we choose to be members of this board, and two we need to choose to answer the poll. Also someone could lie or estimate mistakenly when answering. They are fun though. And I agree with your analysis. There are 60 people (right now) in the 10-25% category which contains the 16% S&P500 return, but there are more people in the categories above that (55 people) than there are in the categories below that (46 people), and as you pointed out the higher categories have larger ranges than the lower ones, so it stands to reason that the center is on the higher end of that middle category, not the lower. Also, I apologize for the offensive looking results using 5 categories produces. Like being flipped off every time you look at it. You're right. It does look like a rude gesture with a finger. It 's not a normal distribution. It's kurtosis with higher than normal central distribution and fat tails. That's the typical distribution for fractal phenomena, including most financial performance or price time series distributions. :)

That's interesting. I wonder if he allowed anything for Sandy losses? Today's surge in the market should conservatively take instantaneous BV/SH to about $91.50, or perhaps higher by Ramsom's methodology. This is interesting as we bought a lot of short term BRK calls last week that are up double or triple what we paid for them. :)

Meyer Shields, Stifel Nicolaus analyst estimates BRK B's EOY 120% of book value is $90.86.

Ha! :) Good one! I know we still have quite a few "cheap" stocks around to be had. However, normally people would be worried about debt ceiling, no? It does not even seem to be getting any attention. I do wonder why... Anybody can share their insight why there is this lack of "concerns" about the upcoming debt ceiling fight? Or that is going to be a non-event? The Market has ben swimming on a sea of liquidity for more than 4 years. The huge special dividends paid this Nov and Dec add to pot. Mr. Market has been looking for an excuse to go up, and he has a fat wallet to pay the fare. It seems like Y2K all over again. :) :(

+20% unleveraged; +25% with non recourse leverage. :) Entirely from Lancashire and Berkshire. :) Smaller positions and hedging barely broke even.