twacowfca

Yes, and no. BHSI will be levering their financial stability rather than undercutting prices, and they will be going after the big game. :)

It might be best not to impute arbitrary formulas to Buffett. :-) Using globalfinancepartners' math on Buffett's example shows an IV increase of about .51%, I believe. Buffett probably just approximated this to 1/2 percent. "Approximately right is better than precisely wrong." -- W.E.B.

This looks beyond edgy, more like over the top. It's something set up merely to dodge taxes, and they had control over the operations.

Hi Eric, I know you are a lot smarter than me but still I think this may work, it may not work also you need to check. What if you create a LLC or hedgefund based in some other state or country and have your money loaned to it.it pays tax in that state or country for trades done and pays you in cash and kind (like buying cars which are leased to you). I don't know what will require to make it legal. if it doesn't work, hope its still ok to post, By the way is this your portfolio? https://www.tickerspy.com/member.php?mid=74868&pid=105574 I don't think what you are describing would qualify under IRS regulations.

You will probably need to show that you are a "sophisticated investor", not merely a "qualified investor " to be able to execute derivative trades with a major investment bank. I had to meet with a panel from that bank and show them that I had a very long history of executing derivative trades and that I knew things about derivatives that many of them did not know before I was allowed to join that club. I explained the rationale for a large trade (for me) that I wanted to make. They thought what I was wanting to do was risky at first, but then they came to understand that I was actually reducing risk by taking money off the table while increasing notional exposure. All the trades have worked out extremely well for me and not unprofitably for my counterpart because those trades were merely part of their delta hedging. Be aware that once you are a member of that club, you will have to hold your own against those who know every sharp angle. May I suggest instead that you simply start to deal with the family office of a major brokerage and let them purchase the derivative for you. That might actually be the better way as my first experience trading with the bank was unpleasant because their traders seemed to view me through the same lens as the car salesman uses to size up the proverbial dippy blonde who wants to buy a car. :) Wherever you go, shop around. I haven't been pleased with the negotiated price quotes I've gotten through my broker and have gotten better deals negotiating directly with the TBTF bank, once their traders realized I could hold my own with them.

You're welcome. :) Blast from the past! lotsofcoke and other action heros never die. :)

Oh Canadia . . . I knew it! You really are the 51st State. :)

That's interesting as well. Their recent large acquisition seems to be working out well. It certainly hasn't cooled Weschler's ardor for buying their stock. It's not incompatible with the other thesis, however. The companies Berkshire acquires are enabled to do many potentially high return, usually bolt on acquisitions of their own without being constrained by financing or worries of becoming over levered, or the possibility of the CEO losing his job if an acquisition doesn't work out as well as expected. Upon reflection, the idea of Davita's having acquisition prowess in an industry that looks attractive for BRK could strengthen the thesis that there are mutual incentives to embrace each other. :)

I smell a deal. The pattern of BRK's buying DVA over the last two years is reminiscent of their pattern of acquiring BNSF. Opportunistic purchases on the dips at gradually increasing prices for a massive holding. The maximum price BRK paid this year was $119.98/ share, not far from the current price. There are three recent events that suggest there could be an offer to acquire DVA announced by BRK as soon as Q4 this year. 1) DVA's board has authorized an initiative that may increase the existing grants of stock appreciation rights to their CEO and other key employees. A proposal by a shareholder activist to eliminate the immediate vesting of these rights upon a change of control was voted down at their recent AGM. 2) The recent standstill agreement signed with longtime DVA shareholder Ted Weschler acting also for BRK may be a prelude to an acquisition offer. 3) DVA has finally hired a permanent CFO with an interesting background. He holds a Ph.D in molecular biology from Cambridge University. He has run biotech companies. In recent years he has worked on Wall Street, first as a deal maker for Credit Suisse and recently for Goldman Sachs. It goes without saying who WEB's favorite investment banker is. DVA's new CFO will be joining them as their Financial VP in mid September. He will officially assume the duties of CFO on Sept. 31, one day after they file their Q3. It will be interesting to see what happens after that. :)

He isn't a gold bug. He has described these as being a hedge, not likely to do well except in inflation. In that event, the payoff is asymmetrical, much more than owning gold itself. :)

FNMAK and FNMAP are even much cheaper than the above today. Are they (the preferred issues) all ranked pari passu? yes, excluding treasury's senior prefs Yes. . . . But in the rare event that the dividends on these are restored, those with a higher dividend rate would be worth more. In a reorganization, they should be worth the same.

The security's claim still has standing. If the sweep amendment was illegal, it still is. It doesn't matter who now owns the security, but rather that the security itself was wronged. Caution: I am not a lawyer. I know nothing about law so the above could be complete BS. I did take the LSAT though. I hate logic games. If Fairholme doesn't have standing because of post-third amendment purchase timing, it's safe to assume that WR Berkley & Co. won't have the same problem since they bought before conservatorship. Good, that gives the plaintiffs the moral high road. :)

The security's claim still has standing. If the sweep amendment was illegal, it still is. It doesn't matter who now owns the security, but rather that the security itself was wronged. Caution: I am not a lawyer. I know nothing about law so the above could be complete BS. I did take the LSAT though. I hate logic games. Agree. Also not a lawyer, but have been told by a top securities attorney that the current owner of a security stands in the stead of all who previously owned it. Practically, that attorney advises that judges often are less sympathetic to speculators who scoop up a security at a low price after the damage has been done. Is there a named plaintiff who owned the prefs before the US takeover? That would be a big moral plus. :)

The arbitrage is part of that future. It is often possible to arbitrage in the present the indeterminate future state. Financially, the present IV might be half of Schrodinger's Cat. Or about 500 live cats out of 1000 whose future state is indeterminate. :) I don't think it is possible to do anything that does not belong in the future. Once the connectors in my brains start firing time has already elapsed. Here's a commonsensical example of how IV can change. Lets work the same idea backwards. Lucky Joe has a dollar while standing at the crap table when a rare circumstance presents an even money bet. The intrinsic value of his dollar is . . . one dollar. He lays his dollar down on the even money bet. After the roll of the dice, the intrinsic value of that wager is definitely going to change. It will be worth zero or two dollars, but definitely not what it was worth before the roll of the dice. :)

The arbitrage is part of that future. It is often possible to arbitrage in the present the indeterminate future state. Financially, the present IV might be half of Schrodinger's Cat. Or about 500 live cats out of 1000 whose future state is indeterminate. Likewise, it is possible to come up with a scheme to realize in the present the expected value of fifty cents in the coin flipping contest. That value would be real, arbitraging the two equally probable future states.

The logic in this thread is deeply flawed in the arguments that IV is what it turns out to be in the future. The flaw is the unstated assumption of no arbitrage.

valuecfa, what do you think about the recently filed litigation by Perry Capital? I think it has merit. With the prefs currently at 17 cents on the dollar, i think the market is mispricing the probability of success. I doubt the courts will end up being the deciding factor in the investment, but if they are, then this could take some time (recall mbia) I'm on the sidelines but becoming more interested every day. I've often wondered over the last two days or so where the free-market conservatives are -- shouldn't they be shouting bloody murder with the de facto nationalization of Fannie & Freddie? It's an interesting story if only from a political angle. If you don't mind me asking, did you buy a particular series or just a basket? I purchased 3 different series. The more illiquid ones with largest discount to par, ignoring the coupons for the most part. I've been purchasing over the past few weeks, but made what may be my final purchase yesterday. Currently about a 6% position. That's what we've done over the years. Bid on the most illiquid with the greatest disount from stated value first, and then go up fom there. Sometimes, when the prefs are getting bid up, we'll sell a relatively overpriced issue even while we are generally buying other issues. We sold a substantial amount of the more liquid ones a few weeks ago for as much as 30%+ of stated value while continuing to hold or even increasing our holdings of the less liquid series. Unhappily, these are usually more rationally priced in recent months as Bruce and other managers of large funds have taken notice of the uncertain potential of value for the preferreds.

And the room rates at the Hotel de Paris are not inexpensive. :P

Or the Cheshire Cat's disappearance until only the smile remained. ;D Schrodinger's Cat would be more like mark to model derivatives: "good until reached for". ;D

The US system incentivizes using the most expensive treatment options available, even when cheaper options are clearly better as established by controlled studies. This is a continuing theme in the books we publish.

One body of prior evidence is what typically happens at the end of a super credit cycle, Reinhart and Rogoff , Richard Koo stuff. The other body of evidence is what happens specifically in the US as the Fed starts to turn off the taps after a long period of easing when interest rates were absolutely or relatively low, for example in the mid 1950's or in the mid 1990's. In those cases, there was a rotation out of low yielding bonds as bond holders started to experience mark to market losses when interest rates began to rise. Before long, some of those funds found their way to a different asset class with a much higher earnings yield that wasn't in a downtrend. Eventually, that led to bubbles, but in the meantime, the stock market doubled or tripled. :) Time will tell which storyline comes true. Meanwhile, I think we will tone down speculating on the market direction in the absence of important, new information and hold stocks in great businesses that are attractively priced or otherwise hold cash. Boring, Warren Buffett style investing. :)

We threw in the towel yesterday and closed out most of our hedges at a relatively small loss because we obtained what we think is additional informed prior information to add to our Bayesian analysis to assess probabilities about where the market is headed in the future. The answer is : we don't know. There is substantial upside based on one body of prior outcomes and substantial downside based on another body of prior outcomes. In the meantime, it's quite possible that the market could tread water for a while.

Several posts have discussed an aim of achieving returns higher than their cost of capital. How do you calculate Berkshire's cost of capital? I'm curious after reading Buffett's 2003 comment, "Charlie and I have not the faintest idea what our cost of capital is and we think the whole concept is fairly crazy, frankly." Warren and Charlie dismiss any calculation that involves using beta like a cost of capital calculation. Yup. CoC calculations often use CAPM, and that is deeply flawed., But the idea of thinking of CoC as an opportunity cost isn't necessarily something they would reject. Using an index as a benchmark or, so to speak, as a proxy for their CoC is an idea they have embraced. CoC is a useful concept although problematic to calculate precisely. It's interesting to keep the idea of CoC, broadly defined, in mind, not unlike that other useful concept, intrinsic value. :)

Several posts have discussed an aim of achieving returns higher than their cost of capital. How do you calculate Berkshire's cost of capital? I'm curious after reading Buffett's 2003 comment, "Charlie and I have not the faintest idea what our cost of capital is and we think the whole concept is fairly crazy, frankly." Simply defined, it's the opportunity cost of investing in something similar. For BRK as a huge, diversified company, that could be the return one might expect to get by investing in a large cap US index fund, perhaps about 9% based on historical returns or almost 6% real returns. Or perhaps a percent or two more than that if one thinks that BRK is "riskier" than such an index fund. BRK has done much better than that, more than double the nominal return or triple the real return since WEB took over BRK 's management in the 1960's. Interestingly, BRK has continued to make about twice the return of a large cap index over the last 12 years, while equity index returns generally have been relatively low by historical standards . :)

The never ending story continues. The arbitrage on this worked very well for those willing and able to borrow and short the common because the recent bill does adhere more or less to the absolute priority rule with the preferred having priority over the common. Time will tell, meanwhile this Bill like many other proposals is between a rock and a hard place. Nonplussed again. The interesting thing about this situation is like having stock in a company in Cpt 11 in the old days when the reorganization could be strung out indefinitely. In that event, if the creditors didn't want to liquidate the company and if the business could get a decent Return on its capital, the longer the company was in Cpt 11, the better that was as the company was able month by month and year by year to earn itself out of tho hole.