twacowfca

If airlines are crappy businesses, why should feeder carriers be an exception to this rule?

I'll second that - in fact I've noticed price jumps from time to time in small caps after being mentioned here - might be coincidence, might not. It's his homework, he doesn't have to let us copy it! Plus, when a co is buying back shares, it doesn't pay to tout it if you intend to hold it long term.

That was a quote directly from Thorp, based on his impression of the dealer's thoughts after his first score. How do I know? Don't ask. :)

Mystery solved! Why WEB bought Munich Re. Munich Re reported Q4 & EOY results today: Q4 earnings E 780M; 2009 full year: E 2.56B; div +4.5% E 5.75. Share buyback by April 28, up to E 1B. Most important, they cut @ 6% of their property cat renewals and as a result their renewal pricing dropped only 1% from the very high rates of Jan 09. :) This implies that WEB has positively influenced the big three, BRK, Swiss Re & Munich Re to maintain pricing discipline in a market that would otherwise be significantly softening. It is hard to overemphasize the importance of this development! :)

Being one of these "investors" sounds like good work if you can get it. Even WEB is not beneath such easy labor. A few years ago, he bought Lazer Mortgage after their plan of reorganization was announced. His total investment: $1 million, equivalent to an investment of $5.00 by a mere mortal. His upside: about 10% over 6 months on a sure thing. He also got a free lottery ticket on a yet to be settled lawsuit that could have added significantly to his return. I think WEB gets as much satisfaction from "sure thing" investments as the rest of us get from big scores. :)

Martin, Our records show that the squeeze out price accepted by a majority (LOL) of shareholders in 2007 was 148.90 Euros; we sold on the market near that time 161.49 Euros. In February 2009 the shareholders who didn’t sell received 165 Euros. Is this correct according to your post? Was the higher price in February, 2009 a reflection of accumulated interest, or what? Am I correct in my understanding that the hold-out shareholders are likely to receive even more on average perhaps 25% more than the February, 2009 price? If so, great for them, BUMMER for us. (Actually, why should I complain about a one bagger for a year and a half hold?) :) By the way, we bought Kolnische Ruck in 2005 as a result of a lead that was posted. Were you the poster? If so, many thanks. :) TWA

Martin, I was checking some of your older posts, and I noticed this. We owned Kolnische Ruck for a few brief months before Warren's take out. I had no idea that shareholders might receive more than the take out price. Any further word on this? At the time I thought his price was most generous. Is this typical in German courts?!

Gotcha!

Yeah, ok, fair enough. ::) ::) KO was ridiculously overvalued, and BRK is just is the process of getting less ridiculously undervalued. The exaggeration aside, the point still stands. Once a security hits its IV there may be value in re-examining whether you should still keep it. In retrospect, I should have dumped BRK the last time the baby-Bs hit $5k. I don't want to make another error of omission. SJ I have a confession to make. I too have, on occasion traded out of BRK. But I've repented, and am no longer tempted, at least when the price is relatively attractive, the wind is in their sails and the weather ahead is clear. :)

KO at a P/E of 50 VS BRK at P/BV of 1.3?! Yikes! What a hot potato!

Don't even think about it unless you find something much better. Realize that BRK has been chronically undervalued compared to all other S&P500 cos. In the future, it's likely that the value of the cos in the index will no longer be a ceiling for BRK's relative price, but usually a floor if BRK continues to maintain it's superior economics after Warren meets his maker.:)

WOW! It seems that the number of shares required by funds that must hold BRK or fall behind their peers is much larger than merely the shares index funds must have -- BY A FACTOR OF FOUR ! This scramble for shares could become a feeding frenzy.

Martin, the BS value for the call European style is about 29 Euros, based on historical volatility. The 17 Euros quoted implies volatility of about 25 to 26, not a bargain, and not high either, in view of the fact that historical vol is greatly influenced by the recent financial crisis. In normal times a vol of 25 to 26 might .be a little on the high side. All things considered, the current price is probably about right, as valued by those who follow Black Scholes. The reason it's not a great bargain at the current price is the high dividend. Nevertheless, the speculation is more likely than not to make money because Warren bought the stock and evidently calls. The great majority of the purchases of the greatest stockpicker of all time work out very nicely in the frame of the time remaining on the option :)

Well above average, I think. Barron's had a good feature article on them about three years ago, I believe. You may want to read it.

Martin, there are a couple of ways to approach valuation of the calls. The standard way is by using the BS model (pun intended:) ( Actually BS is useful for valuing short term options.) One can use historical volatility and compare that value to the values calculated under various arbitrary figures for implied vol. Then these can be compared to the vol that is actually implied by the current pricing of the option in relation to the parameters for the stock, including the very important high regular dividend that should theoretically be a drag on the future appreciation of the stock. We'll run it through our calculator and get back to you later today. It's likely that the current price of the calls will turn out to be low in comparison to values established by these methods. However, BS and related models truly are BS when used for pricing of LEAPS because they make no allowance for a commonsensical estimation of the trend which can overwhelm the influence of volatility especially for very long dated LEAPS. Here's how we approach a buying decision for LEAPS: First, we run BS three or four different ways to see if the option is a bargain by conventional valuation. If so, we do a back of the envelope Bayesian analysis, assigning the best probabilities we can estimate for future scenarios of change in value for the common over the term of the LEAP. Then, we combine the weighted probabilities and determine an expected value. Finally, we estimate the probability for all the scenarios that lead to positive outcomes versus those that don't. This is important for position sizing because the expected gain may be high, for example 10 • the cost of the LEAP, but if half the outcomes lead to a loss, you shouldn't bet the farm. Using the Kelly formula can be helpful for sizing the position, but you can ignore this if you're betting a very small amount of your capital The method I' ve described above can also be used for evaluating greatly distressed equity, for example the common of a co in Cpt 11. You may recall a few years ago when we had a substantial holding in USG and you were chairman of the unsecured creditors committee. In that case our holding USG common was like holding a six year LEAP (the average time it took then to reorganize an asbestos related bankruptcy) on the estimated probability that the co would exit Cpt 11 with something substantial left for the sharehoders.

Good point. It looks like perhaps 10 - 12% of BNI's stock is now owned by index funds or those who may be short term holders. This percentage may rise as the effective date of the acquisition draws near. If BRK's price rises substantially above $120K, almost all the BNI holders will want to receive the maximum allocation of BRK shares. In that event, index funds and those who have executed equity forward contracts-- intending to fill with BRK shares allocated to BNI holders, are apt to come up short because virtually all BNI holders would want to receive the maximum allocation of BRK shares. Quants involved in merger arbitrage or new additions to the S&P500 must be bleary eyed trying to wrap their arms around the nonlinear variables in this one. :)

The downward adjustment in BRK shares received by holders of BNI who elect to receive BRK stock will cease once the BRK equivalent price for A shares rises above $120K/sh, with the basis for the price of the A shares to be calculated as the average price for the five trading days before the effective date of the acquisition.

Here is an update of the log chart of BRK-A (Darker Line) vs the S&P 500 for January 2010 through the close on January 28th. :)

The recent comments by WEB that adding BRK to the S&P 500 index means that BRK will soon have a new "shareholder" who will be required to purchase for his index funds a great amount of BRK's shares suggests the possibility of a new phenomenon : a Long Squeeze. Dynamic and Vinod1 have pointed out in their recent posts the uniqueness of BRK's addition to the S&P500, a megacap that has never before been purchased by index funds or similar funds. WEB recently stated that this will be like having a new, permanent shareholder ( likely next month ) that will have to buy 6 to 7% of BRK's stock. Is it likely that shareholders will willingly cough up such a large number of BRK's until recently thinly traded shares from the most solid base of long term "partners" of any NYSE company without demanding a hefty premium from Mr. Market's recent feeding frenzy for BRK's shares?

Low p/e is somewhat redundant because their model measures this aspect of value in a somewhat different way. High dividend yield is rarely found in MFI stocks, and is a different aspect of value that doesn't improve their model results, if I'm not mistaken, in our attempts to tweak their model a few years ago.

I agree with your assessment, Harry. The MOI checklist has a lot of generally good value investing criteria, but some of these checks may not resonate with the MF model. For example, excluding a co if there is substantial insider selling and excluding faddish cos. Our biggest winner from the MFI list was a co that should have been excluded by the checklist: Deckers Outdoors. Scuttlebutt research with the teenage daughters of friends suggested that their boots were still very popular, although many suspected they were a fad in the fall of 05. Insider selling was massive. Normally a big red flag, but a little digging revealed that the selling was by the founder who was mad at the CEO who had an awesome track record elsewhere and had transformed their business for the better. Finally, the huge late summer and early fall build up in their inventory was not a red flag, as it is on screens for such cos because their boots were still hot and most sales were in the fall and winter, necessitating a huge buildup before their prime, cold weather season. In summary, the MFI screen is a great starting point for digging deeper to see if you can find a gem.

We tried some systematic overlays. Only two of these that we could identify seemed to be promising. Putting MFI in mothballs when the economic cycle ( as measured by objective criteria such as standard deviations for unemployment) is peaking , rolling over, and approaching the bottom. However, this would improve the returns of virtually all long models. Secondly, the quality of the business, measured by the industry code broadly defined, not too specific. I asked Joel once in a Q&A session about MFI which industries performed better in his model. He answered, "I can't talk about that". But he was willing to answer all other questions about the model. I posed the same question on another occasion to one of his close younger associates, and received the same answer.

We took more than a cursory look ( but less than definitive ) at MFI a couple of years ago. Our tentative conclusions were as follows: It works best when value investing in general outperforms in the market. Don't expect good performance in a bubble or when the market rolls over on top of the bear. It seems to work better for some industries than others. Tech especially seems to be problematical; it may be that when a tech co shows up on the MF list, this sometimes signals an impending loss of their fleeting advantage. Companies and industries that don't have subpar economics seem to do better than others when they show up on the MFI list at a time that the MF model is outperforming. Does anyone have more info about which industries work especially well? When the economy was in good shape, specialty retailing and consumer cos with brand names seemed to do fairly well, but poorly when the model wasn't working.

The MF is a good screen. The problem with backtested screens is that these rarely identify durable criteria. The hypothetical returns from models based on such screens usually involve switching frequently from stocks that no longer meet the criteria to other stocks that do. In the real world, flipping stocks generates frictional transaction costs that usually cancel the hypothetical gains. Nevertheless, the MF model uses a holding period that is a little longer than similar value oriented models. They have recently launched a fund based on the model which is currently outperforming. It will be interesting to see how well it performs through the entire cycle, including the less frequent periods when the MF model tanks. If you forced me to make a bet, I would bet that their model in actual trading will outperform most other funds, including index funds.