twacowfca

Read John 3:16. :)

Myth, I wouldn't leave you hanging out to dry. I may seem harsh, but there is always a goal in mind. Thank you for the compliment. Many thanks for sharing your good idea. Also. kudos for your provocative way of getting board members to pay attention to your idea. :)

I think you have answered your own question. The expected gain as SD pointed out is $90K. Allowing for the time value of having your money tied up for a few years, the value of the option would be about the $60K you estimated. :)

Excellent advice! There are other factors that urge caution. The time value of money. 4 to 5 years to close The value to you if this works out favorably may be only about half the $ 300K you estimate because holding an asset at a discount to market value is not the same as treating the discount as a gain. Using the Kelly Criterion helps clarify the risk of buying the option. Reducing the value of a favorable outcome to $150K suggests that you should risk no more than 22% of your funds that you can afford to lose to buy the option. Risking no more than a half Kelly, 11% of your funds at risk should be the max IMO because scenarios such as the one you describe are usually riddled with overly optimistic biases.

Think about the implications of BP's big loss. What major oil company will even think about drilling in the deep water Gulf of Mexico in the US zone even if and when the ban on drilling there is lifted? Who will pick up the leases? At what price? Who will be willing to take the risk of drilling? Who will go broke waiting for drilling to resume? Comments?

It's very possible that WEB and Berkley are both right. Sticking to the best municipals, obligations of state governments and bonds for essential services such as existing water systems that can cover payments by simply raising rates to customers, will produce a default rate that is a tiny fraction of 1% if the years impacted by The Great Depressoin are excluded. Such munis are very secure investments, but not necessarily a good insurance risk because the premium may also be less than 1%. Plus there is always latent tail risk. It's not impossible that conditions like the 1930's could happen again.

Here is the latest update showing how the change in the S&P 500 continues to track the change in the monetary base fairly closely with a certain amount of lag.

Pricing “spectacularly stupid”: Walsh 09 June 2010 Countering accusations over the past two and half years that his firm was undercutting rates to keep business, Nicholas Walsh, vice-chairman of Chartis, has hit back saying that... Read more: [Chartis] [Nicholas Walsh] [AIG] [iIS] Countering accusations over the past two and half years that his firm was undercutting rates to keep business, Nicholas Walsh, vice-chairman of Chartis, has hit back saying that it is start-ups looking to build market share and older rivals looking to grow geographically that are slashing rates, not his firm. Chartis is the general insurance operations of American International Group (AIG), which was bailed out by the US government in 2008. “There is some spectacularly stupid pricing going round,” Walsh told the IIS Reporter. “People are trying to establish a piece of business or a portfolio. It will come unstuck. Always has, always will.” Walsh says the pricing environment will lead to, at best, lacklustre results for this year. “As long as they continue to underprice their product to the level they are doing without the benefit of reserves emerging from prior years, the P&L in insurance companies will be very dull at the end of this year, even without some kind of event or events in the US which everybody is talking about as being more likely than not. “It is just absurd underpricing. People are using the excuse of new capital coming into the market and saying they have to be more protective of what they have. Or there are companies with geographical ambitions, partly fed off an expectation that we would be giving up our leadership position and partly a feeling of ‘let’s find something new to do’, and I think a lot of that is going to become severely unstuck. If you underprice your product for long enough you go out of business.” Walsh says the catastrophe activity already this year should have served as a wake-up call to insurers, but so far has not. “I just don’t recall a period of so many mid-sized natural catastrophe market events and then you add on a couple of manmade ones like in the Gulf of Mexico and we haven’t entered the cat season, it has been dramatic. And why nobody is taking this into account when they price is completely beyond me,” he says. Walsh says Chartis is no longer being affected by the uncertainty at its parent company. In early 2009, the unit was renamed Chartis and was being readied for an IPO. But since Robert Benmosche took over as CEO of AIG last August, this plan was abandoned. Chartis is seen as a core unit of AIG now. “In the current trading environment, Chartis does not have any overhanging trading issues with what happened to AIG. It is no longer an acceptable excuse for not meeting our targets because it is not having any effect. We don’t have issues with insurers not accepting our paper on coinsurance, particularly on the multinational side. That’s history. We are just trading in a poor environment in the same way that we would have done in our history. “In the US domestic side of the business, we are still losing top line but it is deliberate because we are continuing a process we started a long time before 2008, which was to reduce our workers’ comp writing until we can get a decent price for it. That was a very large business, now it is modest size one. And we are reducing property cat because we are now looking at Chartis rather than AIG when we are deploying capital. It is a very large business but it is not AIG with all its diversity. And we are also letting quite a lot of excess casualty business go. I don’t think that [this] business is moving onto another insurer at an increased price.”

Again, the questions weren't supposed to be do you agree or disagree with the policy. I agree with the policy of having licensed heart surgeons. However, I recognize that requiring licensing will increase the cost of heart surgery, as it restricts supply. The question in that instance is "Mandatory licensing of professional services increases the prices of those services." I think you would have a pretty hard time arguing that by not allowing just anyone to perform heart surgery, the cost is higher. The questions are restricted to a specific economic impact, and determining how many people do not understand that impact. I'm not trying to argue for or against licensing of heart surgeons; but it is undeniable that by restricting just anyone from becoming one, you restrict supply, and therefore increase cost. Almost ANY economist, liberal or conservative, would agree with this statement. Has anyone on the board read The Constitution of Liberty or The Road To Serfdom by F A Von Hayek or the Works of Milton Friedman? To license or not to license and nothing more beyond that, may not be the way these economists would have approached the issue. Occupational licensing has a downside beyond increasing the cost of services: a false sense that the holder of a license is necessarily competent. Friedman makes a good case that occupational certification would be much more valuable to the public than mere licensure. Occupational licenses do promise that the holder has met certain minimal standards when the license was issued, but the license is generally good for a lifetime, absent gross misconduct or incompetence, granting the holders of a license monopolistic privileges as a group. Certification, and especially periodic recertification, offers greater information about competency than merely holding a license as well as potentially lower costs and better service. :) Example#1: In the US it is generally not required to have an occupational license to do accounting. This is is highly productive. Those with a low level of accounting skill can set up a small business and be self employed, but for more important tasks having certification such as CPA may be required. The profession is self regulated and sets and periodically revises its accounting standards so successfully that government can find little reason for mandating occupational licensure or its own standards. Example#2: Within businesses that were generally accounting in nature three companies rose to prominence rating bonds. They became so good at this that the government mandated that regulated financial institutions must have a large percentage of their assets in securities that received a high rating by one of these three companies, effectively giving them an exclusive license in this very important area, a de facto oligopoly. I think that most of us know how this second story ended sadly with these outstanding organizations becoming sloppy with their license that protected them from the healthy influence of competition. The worst effect of licensing these organizations was to cause financial organizations to suspend judgement and rely on their license as approving their competence to rate strange, new, very complex securities.

Again, the questions weren't supposed to be do you agree or disagree with the policy. I agree with the policy of having licensed heart surgeons. However, I recognize that requiring licensing will increase the cost of heart surgery, as it restricts supply. The question in that instance is "Mandatory licensing of professional services increases the prices of those services." I think you would have a pretty hard time arguing that by not allowing just anyone to perform heart surgery, the cost is higher. The questions are restricted to a specific economic impact, and determining how many people do not understand that impact. I'm not trying to argue for or against licensing of heart surgeons; but it is undeniable that by restricting just anyone from becoming one, you restrict supply, and therefore increase cost. Almost ANY economist, liberal or conservative, would agree with this statement. Has anyone on the board read The Constitution of Liberty or The Road To Serfdom by F A Von Hayek or the Works of Milton Friedman? To license or not to license and nothing more beyond that, may not be the way these economists would have approached the issue. Occupational licensing has a downside beyond increasing the cost of services: a false sense that the holder of a license is necessarily competent. Friedman makes a good case that occupational certification would be much more valuable to the public than mere licensure. Occupational licenses do promise that the holder has met certain minimal standards when the license was issued, but the license is generally good for a lifetime, absent gross misconduct or incompetence, granting the holders of a license monopolistic privileges as a group. Certification, and especially periodic recertification, offers greater information about competency than merely holding a license as well as potentially lower costs and better service. :)

AWH is in a lumpy business that cannot be intelligently evaluated without reference to their long term record, sector and competition. Good and bad quarters should be related to long term results.

Your last paragraph is insightful. Thank you for sharing your wisdom.

Thank you, Sanjeev, for all you do to keep the very best investing site running well. :)

That's a good list. Similarly, growth in FDBV/share would be our #1 metric. If possible, we like to average that over two complete business cycles or sometimes use a proxy like Brindle's record at Lloyds. If records for two cycles aren't available, we'll take what's available and normalize the record the best we can, but a company with a long term record and good prospects would be preferred. Can you give more detail about how you compute market value return vs BV? A good proxy for how much skin the CEO has in the company might be his economic interest in the co vs his compensation, aside from objective performance based compensation.

I always give high weight to a company whose CEO has a large amount (50% or more) of his wealth in the company, provided that he has a long term record of dealing fairly with other shareholders.

Hypothetically speaking: A person makes public statements about taking a low salary and not receiving other forms of compensation such as options. He attracts a following of shareholders after making other statements about emulating Buffett's philosophy of modest pay and prospering with other shareholders in the success of the enterprise. A measure of success is achieved, and the successful takeover artist, now CEO, influences changes in the board of directors. He cements his position with various golden parachutes, authorized by his board. The entrenched CEO plans with his board to gain an unprecedented lucrative pay contract contrary to past statements. Might such actions be grounds for a RICO lawsuit or other RICO charges? Please comment RRJ or others with experience. ( this scenario is imaginary and is not intended to be a fair description of any real situation. It is not meant to be an allegation of what may have occurred with any individual or board of directors. )

Greenberg executed some sort of equity forward contract with an investment bank some months ago to sell his AIG shares. Could this strange security be related to that?

There's risk with property cat insurers, but the risk becomes apparent soon after an event. No mystery meat. It's difficult to fudge short tail property reserves for more than a quarter, although losses on a hundred year event like KRW may take a little longer to fully develop. That's why Bermuda Re property cat insurers are incentivized by quick loss developments to be generally over reserved. This gives them a little cushion when they have a bad year.

True, but BRK may be in a class by itself. A few years ago the SEC subpenaed BRK requiring them to doccument how they set the amount of their reserves for long lived liabilities like A&E. This was peculiar because BRK had the most conservative reserves of any P&C insurer. It seems that the SEC wanted to use BRK as a standard of comparison for other cos like FFH that they were investigating then. The doccuments were eye opening. FFH had strengthened their A&E reserves then to a level of about 9 years or 9 times its annual payments, a level that was above average compared to their peers. BRK's reserves were 17 years, far above the reserves of any P&C competitor! Very Interesting. Things like this make book value a very difficult metric to rely on and make trust in Management an important key for insurers. Yes. Things are not always what they seem, especially for P&C cos that have a lot of long tail casualty business. That's why I like short tail property insurers and only a handful of companies like BRK that have a substantial long tail book. Even with these, there is always the chance that some latent liability will blow up as many years of time pass.

Are you referrring to the AIG related subpoenas from January 2005 that are discusssed in the BRK 2006 Annual Report? Yes.

The distributions are to both Lampert and Crowley, so it's hard to say. It will be interesting to see how big the follow-on distributions are in July. Perhaps they're the only partners with sufficient ownership to have to report the distributions formally? In my imagination, Lampert is winding down the partnerships to focus solely on running SHLD (and to a lesser extent AN and AZO). And, (still wildly speculating) by the end of the year there will be a merger of SHLD and AZO announced. A merger would be interesting. AZO is a great operation. Had a great experience at a local autozone Easter Sunday. Out of town relative had a car breakdown and autozone was the only parts place open. They diagnosed the problem (bad alternator) supplied the correct part and called a freelance mechanic who came right over on his day off and made the repair for $100 plus the cost of the part. Our relatives were able to return to their home in another state after only a two hour delay. :) AZO's cash flow might be enough to tide SHLD over for a few years until the RE market recovers enough for their RE to be sold with ( how much ) value left for shareholders. Comments?

Where did you hear that The El Nino had been replaced by a La Nina? Last I heard, the El Nino was expected to fade and be replaced by one of the more frequent intermediate states with a low probability that a La Nina would arise during this hurricane season.

True, but BRK may be in a class by itself. A few years ago the SEC subpenaed BRK requiring them to doccument how they set the amount of their reserves for long lived liabilities like A&E. This was peculiar because BRK had the most conservative reserves of any P&C insurer. It seems that the SEC wanted to use BRK as a standard of comparison for other cos like FFH that they were investigating then. The doccuments were eye opening. FFH had strengthened their A&E reserves then to a level of about 9 years or 9 times its annual payments, a level that was above average compared to their peers. BRK's reserves were 17 years, far above the reserves of any P&C competitor!

The US gov can print or otherwise craate money but they can't instantaneously print inflation in most circumstances because there is normally a lag of several months between the creation of money and its effect on the economy. This lag becomes longer in a deflationary environment until the saving, hoarding and reluctance to extend credit turns around. After the economy turns, inflation still won't be a big problem most of the time until the slack in the economy tightens up. When that happens, an inflated money supply and nonproductive restrictions on enterprise will usually result in price lnflation.

Ace is the place where the helpful hardware man doesn't beat his suppliers down on their prices as much as Home Depot and Lowes do. Does anyone have an idea about why Lampert just took a huge distribution of shares of SHLD and other holdings of his fund?