ERICOPOLY

The actually time held has nothing to do with it. My interest is to know whether or not he (and others) really picked stocks at a price that represented a discount to intrinsic value. Enough time has passed since his last purchase where a graduate student could look at each and every one of his purchases, the price paid, and see whether he indeed bought at a discount to intrinsic value. He has been dead more than thirty years -- surely the long term business results are known well enough to say if any one of his picks was actually purchased as a 50 cent dollar, or as a 90 cent dollar, or a 120 cent dollar, etc.... Then you can see how he did "on balance", by looking at all of them and then taking the average. What if on average he merely bought stocks near their intrinsic value and made money on volatility swings? Okay, that doesn't mean it's a losing strategy at all, but it would be interesting to know if the guy that wrote The Intelligent Investor was really able to accurately determine intrinsic value himself. We know that Warren Buffett can because Berkshire has grown mostly from keeping the holdings "forever" -- the long term weighing machine is producing results, not the volatility and skillful trading.

The household debt service ratio is at nearly the lowest point in 30 years. It's not low because the debt is low, it's low because the interest rates are low. Mostly due to refinancing.

That's exactly what I'm talking about. A guy can make a profit on it yet it might not be a value trade at all. It might just be a trader under the grand delusion of seeing a future that is just completely made up. But that grand delusion gives him the discipline to sell after a big rally because he believes it to now be close to intrinsic value. So to see if an investor really has the talent to spot a large discount to intrinsic value with a high degree of accuracy you do this to him: 1) Ignore his actual track record 2) Look at what he purchased 10 or 15 years ago 3) Based on the actual underlying cash flows of the past 10 or 15 years, use that information to see whether the investor is actually talented at all in terms of assessing intrinsic value This doesn't mean he can't make money as a good volatility trader. But it might be good for a given investor to be handed a report card that is grounded in reality. Some of them might actually be highly surprised because I doubt they audit their own results like this.

Setting aside the actual compounding returns that their trading strategies have produced for their partners/investors, has anyone actually produced any results based on how the companies have performed in the years since purchased? I remember for example some value investors made money trading Lear Corp common in 2007 but it was a bankrupt company soon after that. There are numerous other examples of this sort of thing going on. Some of these value investors have performed well for their partners. Are they good volatility traders or are they good value investors? I suppose if the investor has a long enough record one can look at the performance of the buys from ten years ago and determine how much intrinsic value those picks really had, versus the price paid. It's relatively easy to know that Buffett is good because Berkshire has generally held his picks for a very long time with few mistakes. You see the academics argue that value investing doesn't really work, but the answer to that would be that they are using data from purported "value investors" who aren't really doing value investing at all.

So the majority of people are wealthy, or the tiny minority of wealthy people are actually refinancing more than the vast majority who are poor? And what of the people who are buying homes? Yes, they may not be refinancing, but aren't they getting a low mortgage all the same?

I like the analogy. It's also very risky to get out of the atmosphere, but some people desperately want to achieve it. Would you say the same for your investment strategy right now? Think of all the people who save and invest in low yielding instruments, then get laid off and soon completely deplete their savings. They have this massive vulnerability to the economic cycle, yet they think their approach is low risk because they invest in can't lose securities. I took that risk off the table. I personally don't find BAC to be all that risky but I've got that protection anyhow in case it goes sour.

I figure the price of fueling the average car today is on the cheap end of historical experience. Except for the 1990s when most commodities were historically cheap, the period around 1972 had the cheapest gas prices. However the fleet averaged about 12 miles per gallon. Today the miles per gallon is about 70% higher relative to 1972 and so are the real gas prices -- so the price per mile is about the same. Historical inflation adjusted gas prices: http://www.inflationdata.com/inflation/inflation_rate/Gasoline_Inflation.asp Fleet fuel economy: http://earlywarn.blogspot.com/2011/05/us-fleet-fuel-economy.html

It's only somewhat anonymous. I personally know two of the board members -- one of them is the brother of my best man. It's also not in the culture of this board (or society in general) to discuss how rich you are with precision. I prefer to just speak in % terms. The performance might be good for a while until BAC works out fully, but then it's going to normalize. We're going to transfer a large amount of the assets into things like Berkshire in separate account, and then I'm going to keep maybe 10-25% of the money in an account that I manage. This will keep me with something fun to do, but even if there are high returns it will be heavily diluted when expressed as a % gain of net worth. Think of the space missions. You need a huge amount of energy to get out of the atmosphere, but it doesn't take much to remain in orbit forever.

Romney: The Closet Keynsian http://www.slate.com/articles/business/moneybox/2012/09/mitt_romney_closet_keynesian_the_gop_nominee_may_be_getting_ready_to_ditch_austerity_.html

Perhaps. I think Buffett's approach in terms of purchasing inevitables is that it makes it easier to be certain that you are getting a discount to intrinsic value. Buying something that looks cheap but later isn't (because the business quickly declines)... isn't value investing. This I believe is what Warren figured out a long time ago and why he went the way of inevitables or in other words businesses with very enduring characteristics. Some value investors I believe think they are estimating intrinsic value but aren't, yet they do okay anyway because they have a selling disclipline. In other words, they're out after the first large rally. So they are trading volatility but don't recognize it as such. One of the best posts I've seen on this board, Eric. Precisely my thoughts....except I can't/haven't articulated it that well. As they say, the sign of brilliance is the ability to explain a complex topic in simple terms - further evidenced by the fact that you are up 11x since early 2008! My RothIRA is up 11x (well actually now it's 12x) since early 2008. My taxable account -- you need to go back nearly two more years to get to 11x. Since 2008 I've managed the accounts such that the RothIRA has done better than the taxable account (on purpose). Anyhow, glad we're of a similar mind regarding the inevitables -- it's almost a tautology that in order to be resonably accurate about the future earnings (the intrinsic value) you need to have a highly predictable business (enduring / wide moat).

It mas my paternal grandmother that gave me that advice. She passed last year at age 94. My entire life I remember seeing company reports on her reading table. She had a broker who recommended a list of stocks to her, and then she would read about each one and tell the broker which ones she wanted to buy. The broker effectively did her initial screening for her, which is not that much unlike my process. However my process is to not listen to brokers but rather see what excellent value investors are actually invested in. She finished up with $12million in equities -- there was a family partnership where my father and his siblings had an equal share, but where my grandmother was effectively the managing partner. The goal was to avoid Australian estate taxes, but then in the end there were no estate taxes and the whole thing wound up being an unnecessary, expensive endeavor in the end (lots of accounting fees). My paternal grandfather came to Sydney from Stafford (England) in 1949 and purchased land in Palm Beach (near Jonah's), a house in Lindfield, and a large chunk of land in a greenbelt in Pymble (part of which is either now Avondale Golf Club, or right next to it. I forget which). The land in the greenbelt he never thought would be developed in his lifetime. But Sydney rapidly grew and the land was approved for development. He then sold that land for a spectacular gain -- that gain was then compounded by my grandmother in equities. Last October that house in Lindfield sold for $2,050,000. It was purchased for less than $5,000. Buying land in Sydney after WWII was the crime of the century -- that's a 10% annualized compounding rate for the house in Lindfield, there are no property taxes, and the family lived in the investment so there is imputed rent not included in that 10% figure.

That's a deep thought. I take back my Eric Roshtein comment. Anyways, I remain invested in my deeply discounted inevitable -- BofA. Most of the volatility traders will be fully out of it long before Buffett makes the really big gains. Then they'll lose some of their winnings in some stock that doesn't have enduring characteristics. The sun rises and falls, etc... This is the investment world that Buffett takes out to the woodshed and fleeces for decades on end.

Perhaps. I think Buffett's approach in terms of purchasing inevitables is that it makes it easier to be certain that you are getting a discount to intrinsic value. Buying something that looks cheap but later isn't (because the business quickly declines)... isn't value investing. This I believe is what Warren figured out a long time ago and why he went the way of inevitables or in other words businesses with very enduring characteristics. Some value investors I believe think they are estimating intrinsic value but aren't, yet they do okay anyway because they have a selling disclipline. In other words, they're out after the first large rally. So they are trading volatility but don't recognize it as such.

In Soros' words, we have entered a new phase in Europe's crisis future of the Euro is now assured. That happened last week. This week we have QE3. Are they connected in timing? Will Europeans now move some deposits back to the European continent (taking them from US banks). And if so, so the Fed doing open-ended purchases of mortgages allow the US banks to delever an offsetting amount of assets without disruption if some deposits are pulled back to Europe?

Do the QE policies lead to faster deposit growth at the banks? If yes... Then might deposit growth stall or fall without QE? The importance of which is... look at how BAC is able to replace long term debt with low cost deposit funding. And would they be in a pickle these past few years if those debts were coming due at a time with a shrunken deposit base?

You forgot to mention the clear positives: 1) refinancing mortgages at 3.5% is like giving households a large income raise they aren't finding elsewhere 2) the payments on the new mortgages are not only lower, but they pay down faster in the early years So we wind up with a beautiful outcome at the household level: 1) lower debt service ratio -- they can either save or spend the excess 2) faster deleveraging

I suppose Greenspan has earned the right to criticize a guy who can't build a housing bubble to save his career :)

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You mean the one that we did have last year (October I think) where I posted -25% and UCCMAL posted -35%. Oh yeah, that thread ;)

Eric, sorry if you've addressed this elsewhere, but I'm curious to know what is your view on how all this QE stuff will impact financial institutions (like BAC) that own lots of financial assets denominated in dollars. I have a few guesses, but I'd love your insights.. f.ex. 1) It's bad for BAC because it makes all their fixed rate assets worth less, but the margin of safety in the price is so big that it doesn't matter too much, and if this jolt helps revive animal spirits in the economy, it might be good for BAC on balance. 2) Maybe it's good for BAC in a direct manner. Can they unload some crap from their balance sheet to the federal reserve? 3) ??? I am getting a bit excited for a short term rally so that I can write very far out of the money (like perhaps $17 or $20 strike) BAC covered calls and use the premium to pay off the WFC put liability. Then the market sells off and I can leverage up on my BAC stake again because I'll still have my puts. I personally don't like the selloffs that much (I find it emotionally disturbing), but objectively it does earn me extra money.

I've noticed that too. Actually, when volatility was peaking in 2008/2009 I started to reason that it wasn't fear, it was greed. Nobody in their right mind wanted to blow that opportunity to buy things so cheap by tying up their capital writing puts. Even though the premiums were the best ever, why would you do that when the big money was to be made riding the shares back up. And what sort of an idiot writes a call at the bottom when he can buy a call instead. So that drives up demand for the calls relative to supply and makes them really expensive.

Personally I would have called it the "Bernanke cheering thread".

In this case, I deliberated said I can only lose $2 from BAC. I wasn't being verbose by accident -- in other words, I'm not ignorant to the fact that WFC can drop below $30. I've been down 50% on multiple occasions -- in 2009 for example I was down 50% below my 2008 high at one point, and then again last year I was down 50% at one point off of my early 2011 peak. I'm not trying to protect against that, I'm trying to protect against an event that is specific to BAC.

I am also unsure of what you mean by Notional. Let's say BAC is trading at $10 a share and you purchase 100 contracts at $1.50 each underlying share. This costs you $15,000 to purchase the upside on $100,000 worth of shares. $100,000 is the "notional" value of your contracts, even though your downside is $15,000. $15,000 is 15% of $100,000, thus it is 15% of the "notional" value. Clear as mud?

I think of options in a more fluid sense - I see it as managing likelihoods. 1. This still leaves you with the loss on BAC original position - if you sell your underlying position at that point. Selling the puts on WFC is an attempt to avoid having your protection move up and down in concert so if they do, it is more likely to be from Mr. Market and this presents an opportunity to sell profitable put position and buy more underlying. sure, I was just trying to reconcile the statement of "you can sleep at night knowing your loss is at most 7". To confirm, that sentence is missing "as long as WFC doesn't go down the same amount" I believe? This are my original words before you edited out the important part (now in bold): Now you can go to sleep at night knowing that the worst you can lose from your BAC position is about $2 per share.