twacowfca

Please take a closer look at the example cited. Receiving a dividend of $0.10 per year would enable the holder of one share to buy one tenth of a share per year or a little more than .90 additional shares after nine years. The 1.9 shares owned after nine years would then be entitled to $0.19 earnings per year ( actually slightly more than that because of some compounding on the dividends received ). Even allowing for that compounding that might add a few more cents, this amount would be quite a bit less than the $1.00 in earnings that would be available to the holder of one share in the buyback example. :)

Example: A company with 100 shares outstanding has annual cash earnings of $10 ($0.10/share). The company’s stock trades for $1.00/share. The company has a stable business and continues to earn the same $10 each year for an indefinite time. None of its earnings are needed for reinvestment in the company. The company decides to use all its earnings to repurchase shares. The price per share is assumed not to increase for nine years, despite buying back shares. Each succeeding year, using its earnings, the company repurchases 10 shares at the same attractive price of $1.00/share. Nine years later, the holders of the 10 shares that remain outstanding have the right to $1.00 of earnings per share. Rationalization of the share price would suggest a much higher price per share, perhaps 10 X earnings or $10.00/share. (If the price per share did not rationalize, the next year’s purchase of the first 9 of 10 remaining shares would mean the owner of the last share would own the whole company.) The rationalized gain in the price per share after 9 years is much more than dividends per share of $0.90 ($0.10 yearly for 9 years) that could have been distributed annually in lieu of repurchasing shares. The contrast in value remains even after allowance for reasonable gain from reinvesting the dividends. This example suggests that repurchasing shares whenever a stock sells below intrinsic value is a superior way of returning quantitative value (not necessarily perceived value) to remaining shareholders than paying dividends even when taxation of dividends is not a drag on returns.

Apollo sweetened its public offer to 1075 pence yesterday after Brit reached deeply into it's cookie jar and pulled out a giant cookie of reserves, reporting H 1 income ~@ 8% of BV, even after big losses from the Chile earthquake. BV is now up above 11 pounds and Brit has opened their books to Apollo. My back of the envelope estimate of the probability that the deal goes through is now the 97% probability that occurs in very favorable conditions. However, I'm adjusting the probability to a range of 90% to 95% to compensate for overconfidence bias. It seems that Apollo is going to be able to steal a very good insurance co with redundant reserves for a takeout at little more than BV if no other buyer appears.

Well said. Govermental allocation of capital is wasteful. There is, however one scheme to help those on the lower end of the income scale that has been amazingly successful because it allows lower income people to make their own decisions about allocation. this was prompted by the late Milton Friedman's advocating using a negative income tax instead of wasting resources through programs where government decides who gets what including many hidden subsidies and restrictions on enterprise. What's that, you say? What negative income tax? As usual, in the workings of government, it's not called that. It' called the earned income tax credit. Low income people who qualify get most of their income taxes withheld returned to them after the end of the tax year. This program returns sometimes close to 100 cents on the dollar in value that can be used practically, in contrast to the typical government program that wastes a very large part of presumed benefits through frictional costs and allocations that deliver questionable value. :)

Reason to Rally a Retroactive Estate Tax? With the potential loss of an estimated $500 million in taxes on the estate of George Steinbrenner, the New York Yankees baseball owner who died on July 13, the Senate may be wishing it had worked a little harder to pass a bill last year that would have extended the 2009 rates rather than letting the tax expire in 2010. In fact, two days after Steinbrenner's death, two senators introduced a proposal to permanently set the estate tax rate at 35 percent, with a $5 million exemption indexed for inflation and phased in over 10 years. The bill would also provide a "stepped-up basis" for inherited assets, meaning capital gains on future sales would be taxed on the value of the assets at the time of the owner's death not the original value when the owner purchased them. If Congress takes no action, the federal estate tax in 2011 will be 55 percent and a $1 million exemption. The 2009 rate was 45 percent with a per-person exemption of $3.5 million. Applying 2009 rates to Steinbrenner's $1.1 billion estate (as estimated by Forbes magazine), his heirs may have forfeited almost $500 million in taxes. Even without a current estate tax, Steinbrenner's heirs must pay capital gains tax when they sell their inherited assets. Using the current top capital gains rate of 15 percent, if his heirs sold the assets immediately, they would pay about $165 million (depending on how much the assets have appreciated since Steinbrenner bought them). That's a difference in tax of about $328 million - or, as the Associated Press put it, about 10 times Alex Rodriguez's salary of $32 million

Yes, there is always the risk that a prospective buyer who makes an offer will walk away. That's what makes game theory interesting. However, this sort of jockeying is normal in these situations. Prospects look good IMO, although not certain. There is a willing buyer and a willing seller. They are talking quietly behind the scenes and not conducting a PR war. Apollo hasn't even engaged a PR Firm. The executive directors of Brit will get a huge payday if a deal goes through because many options they are entitled to will vest upon a change of control. The small number of funds who own most of Brit's shares would like to sell if the price is right. If Apollo walked away from a willing seller simply because the owners were not keen to accept a lowball offer, Apollo might become unwelcome among the brokers in the industry. If Apollo hangs in there and no other buyer appears, Apollo should be able to pick up a very good business for very little premium to BV, a company that likely might be able to dividend out twice their current annual payout in special dividends, as they have been passing on business that isn't likely to be substantially profitable on underwriting.

Surprisingly, I agree. :-\ There are a few gems. I like the one when he says that all returns are made in bull markets. (most people don't live in Premville). His point is that people should find a bull market somewhere else when every thing is rolling over on them. He mentioned Australia's still booming from 07 - 09 with the continued high demand for ore as most other markets worldwide were turning down. I agree. Check out Sri Lanka's stock market. How many of us actually noticed that the civil war has ended? How many of us know that Sri Lanka is actually a semi-developed country? If you were aware of that, you'd have made 100% in one of the worst financial crisis without any risk. Nothing is impossible. Thanks. How's the market in Sri Lanka now? Any bargains left?

I don't understand the calculation. There's no monetary value on the left hand side of the equation as there is on the right hand side. The probability of eventual acceptance after a cash offer has been made public can sometimes be as high as .97 ,but only in the most favorable market conditions like the mid noughties when money was cheap and businesses were often selling far below intrinsic value. This may be the situation with the current offer for BRE, but I would think it prudent to discount that probability as overly optimistic because current market conditions are uncertain. Also, offers by private equity companies are not accepted at as high a rate as offers from strategic buyers. :) Bruce Bueno de Mesqueta's book, The Predictioneer's Game, is the most interesting book about the practical uses of game theory. His models have a good track record, predicting the outcome of M&A's.

While some have been investing in toxic waste and buying puts on tar ball futures, guess what’s been happening with the other Brit? The other Brit? It’s Brit Insurance Holdings. BRE:LN . Apollo made an offer of £10.00 for them a few weeks ago, and has since raised the offer to £10.50. Mr. Market has priced the probability of the deal’s closing at 50:50 with about equal upside to downside, based on the current price of about £9.00 compared to a likely acceptance of a sweetened offer at £11.00 or greater. BRE was selling at £7.30 before Apollo’s offer. Using de Mesqueta’s methodology, I’ve estimated that the probability of the deal’s closing at £10.50 or higher is more like 5:1 or 10:1. In the meantime, I get to hold one of the better Lloyd’s insurers with substantial reserve redundancies that’s priced around 86% of tangible book value, paying a VERY nice annual dividend of 6.6%. Am I overly optimistic in my estimate of the odds of the deal’s closing? Comments?

When there are financial incentives, the "forgetter" kicks in. Seth Klarman describes the junk bond mania during the 1980's in Margin of Safety. Change the names of the players and the descriptions of the financial instruments, and there's a play by play scenario of the events that occurred in the mortgage mania about 20 years later. Failure to learn that lesson isn't a memory problem. Anyone over 45 on Wall Street during the recent mortgage binging could probably tell all about the earlier junk bond mania and S&L crisis, but why spoil the party and miss all the bonuses?

People in small town Georgia still remember Sherman's march even though that happened generations ago. People in Iceland still remember the outlaws who hid out in a particular cave hundreds of years ago. Real events that happened in locales are indeed remembered vividly for many generations, unlike the "lessons" of history books.

I think if you are sitting on a gain, then buying a put at-the-money or in-the-money falls under the restrictions of shorting "against the box". I think it restarts the holding period as you suggest when the put is closed out (or expires). I think the IRS uses the term "constructive sale" -- if you search under that term you'll find the rule. Exercising a call option also resets the holding period. You might have been holding that call option for 6 months, but if you exercise it you'll have to hold the shares for an additional 12 months to get into long term hold tax status. So my suggestion works best for situations where long-term calls are not available. When long-term calls are available you have the opportunity to book your gains long-term by selling the call near expiration. Also, buying a leap put on the market index may be a good choice to lock in a gain that will be long term in the future. This is appropriate for a stock that has a beta close to that of the index. If the stock goes down with the index, a certain portion of the gain on the put can be treated as long term, even though you have held the put for less than 12 months. :)

Taleb's strategy is hard to maintain in a rising, low volatility market. His Empirica Kurtosis fund struggled in the last bull market until he closed it in the mid noughties. His new fund launched at just the right time when the market was about to roll over, and they hit a grand slam home run during the market meltdown.

As a member of the stock exchange, he likely would not have been subject to a short term margin call at the whim of Mr. Market. :)

More red flags. Their amortization charge for DAC & DSI jumped about 30% for years after 2007, although premium and annuity income increased only slightly. Other operating expense jumped about 80% in 09 and for latest TTM. The footnotes may shed more light on these, but it would be hard to view these in other than a negative light. :-(

There is a huge catch to their BV. DAC and DSI is more than 60% of their BV. They are employing outside actuaries to reassess the value of these two "assets". This could be on their initiative or this might have been prompted by their insurance commissioner in view of their history of increasing the amortization charge for these in the past. Their EVA has fallen steeply into negative territory in the last two years. The SEC is considering requiring that products like those that they market must be sold by registered agents rather than by unregistered agents that they often use. There is a big lawsuit outstanding (no clue if there is material risk from the suit). On the plus side AM Best has affirmed their A rating. This one is too hard for me.

"The borrower is servant to the lender". Who said that?

Agreed. But don't you think that the big depreciating event can be seen coming at you with increasing probability for some time before it occurs? If so, the rational expectation in the near to intermediate term would be flattish or deflation.

No. 1 is a good choice. Or if you really like SSW, you could exercise what you could afford to hold without leverage, sell the rest and put the proceeds half into cash and the remainder into out of the money leaps if they are attractively priced. :)

Look for leverage that can't be called if you're tempted to use margin. I drooled over a savory dish we had bought a few years ago, wanting a much larger serving, then figured out a way to lever it up while taking most of our money off the table. That's nice work if you can get it. :)

VERY Smart Advice! :)

We go where the value is, using the Kelly Criterion for capital allocation, bearing in mind that danger lurks where least expected. We continually recalculate probabilities and odds, always looking for things that might pop up and ruin our day. That said, we don't like to get in a position where we have to play Whack A Mole, but we may put a few quarters in that game occasionally if the potential reward is great.

We live in interesting times. Take away the immigrants in the US and what have you got? Stagnation. Young adults avoiding procreation, locked out of all the good jobs by the " educational" system until they have missed a quarter of their most productive years. Geriatic pensioners living off the producers in the workforce.

Many thanks. :)

My bad. I was thinking about the 15 year growth rate in BV/SH which is actually closer to 18% than 17%.