ERICOPOLY

To me it's a non-issue. Company buys shares -> shareholder sells offsetting position -> X amount of cash in hand Company pays dividend -> X amount of cash in hand X equals X. Only matters when taxes get involved.

I've been reading this thread today. It's interesting the thesis that the market is hammering DELL over Win8 adoption worries, when I see MSFT at nearly a 12 month high.

Not just that, but a very well defined window in time so that your time decay was not a big deal for the duration of the thesis window. See, the 2014 BAC calls right now are not a case of "either they work out by this November or they don't".

Interesting stuff. So how much of your portfolio did you put into these options? A very large % I assume, since it was enough to help you retire. At what price did you end up selling the option? This is interesting because I was just looking at AIG 2014 $50 calls, which are selling for about $1.50. I'm wondering what you think of them? 17 months till expiration, and the strike is $10 below current per share book value. If BVPS is $80 by then, as some people predict, and the stock sells for 1.0x, then these options would make out very well. But this is all coming from a beginner, so I'd be curious to know what you think of it. I had varying strikes. I kept adding to the $140s as they dropped in price, but I had some $70 strike 2009 calls too, just so that my break-even point wasn't so high if we got all the way to expiration. I had every dollar I could find invested in them. I was not allowed to allocate my 401k to them because it was in an employer plan. But essentially it was 100% of my taxable account and IRAs, and that amounted to about 50% of my total net worth at the time (including estimated real estate estate equity). My 401k was about 20% of my net worth, with real estate equity making up the other 30%. I don't have any comment on the AIG options idea. I'm not using very much notional leverage anymore -- I think you need to reach a certain escape velocity to leave the atmosphere, but then at a certain point it doesn't take much fuel to remain in orbit. Forgot to answer your question: I started selling as FFH approached $160, to cut down on the leverage. It's hard to suddenly come into that much money and remain calm, I wish I had held on longer.

This was my first ever options purchase. DengyuTheNugget worked at Microsoft as did I, and I pointed him in the direction of this board and started telling him about FFH. He then quickly talked me into buying the options instead of the common. I had to go and figure out how to enable options trading in my account. What a good time to learn about options!

The Nobel Prize winners claim that stock prices reflect the data available to the market. In this case, the data was fraudulent and the market price reflected the lies being spread through the media. For example, in June 2006 the stock dropped 10% in one day on rumors that Prem was leaving the country with shareholders' money in hand. So basically if you thought Prem was honest then you had an edge. The 2008 $140 strike calls were priced at $2 a share on June 23rd, 2006. That was roughly book value per share at the time. So that gave you about a 70x leverage on book value. Oh, then there was the hurricane thing... in 2005 they lost a lot of money and it was blamed on KRW, but really they lost a bit more from the runoff division that year than they did from the hurricanes. OdysseyRe reduced their wind exposure by 25% after the hurricanes. The March 2006 annual letter to shareholders claimed that they believed runoff would approach breakeven in 2006. So if you trusted Prem, it was a good bet. The hurricane season is typically over by then end of October, which still gives you 15 months before options expiry. And on June 23rd you could pay just $2 per share for the Jan 2008 $140 strike calls, and $140 strike being roughly book value at the time, a very good chance that you'll at least be able to recover your $2 per share even if there were a repeat of KRW. The stock was just so depressed already, it was almost as if the repeat of KRW had already happened. Plus the short interest was huge -- something like 25% or so. They would cover it stands to reason.

LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod Hire 6 million people and pay them $50k each. That's $300 billion. Nice dent in the unemployment rate. What drives bank consumer losses BTW? Hire them? For something productive? Don't bet on the government doing something productive. On the other hand, a $300B cut in the most regressive tax of all, the employment security tax, paid by both individuals and employers would stimulate hiring in 1001 productive (translation profitable) ways. The unemployment rate would soon come down to normal as increased profits by the forgotten engine of the economy, the small businessperson,would bring into the workforce less desirable workers that big businesses won't hire. Then, GDP would increase sharply as it has not with handouts. It's been a long time since January, but I believe I was referring to private sector, not government hiring. The discussion was of what would happen if profit margins came down due to competition from upstart competitors. I was reasoning that if the upstart competitors hired workers and research labs/factories, etc... well then it would translate to wages/hiring, GDP growth, etc... Translation: instead of one company employing 1,000 workers enjoying fat profits without competition, there might be a second or third company each with 1,000 workers slaving away attempting to steal market share. Profit margins fall due to competition, but people are getting back to work too. So when will the hiring boom happen? Don't people keep forecasting that competition will take away the fat profit margins? Mechanically, how does that happen if not from new competitors?

Their solution: Australia Post is required by law to provide a universal letter service which is reasonably accessible to all Australians http://australia.gov.au/directories/australia/australia-post

The Australian Post charges 60 cents for a small letter (vs 45 cents at USPS), yet it still loses money on the mail delivery. However it does generate an overall profit due to the delivery of profitable parcels: http://www.smh.com.au/national/australia-post-increases-profit-20111012-1ll38.html UPS and FedEx -- of course they look good. They don't deliver letters! They're taking away the profitable business from USPS and leaving them with the loss-making letter business. Basically privatizing the profits and socializing the losses. Go USA!

Yes. :) That was a good quote! I like this comment from Jeremy Grantham: The idea that a bigger safety margin is better thana smaller one, that cheaper is better than more expensive,that more cash is better than less cash, deserves, in modernparlance, a “Duh!” It is just rather obvious, and going onabout it for 850 pages can get extremely boring. http://www.scribd.com/doc/30407102/GMO-Grantham-Quarterly-Apr10

Because it is nothing at all more than... buy low / sell high. Implicitly you must be doing a valuation appraisal to understand "high" vs "low", therefore... value investing. So the father of value investing stumbled upon something that had been known for a very long time...

They purchased large positions in US banks in 2008/2009. They chose WFC and USB. I think they paid about $20 for WFC. Then in 2011 WFC went as low as $22 and they didn't purchase more, so I reason they are not interested in adding more to that sector yet (US banks). They added Bank of Ireland last year. Mr. Watsa gave a speech a couple of years ago where he described valued investing as purchasing shares when companies run into a "temporary" problem. Then the reiterated the word "temporary". Okay, now I can see where BAC's problem is "temporary" (legacy loans + interest rates), I can see where AIG's problem is temporary (interest rates), but I can't see where RIM's problem is necessarily "temporary" (need to keep inventing in a very competitive space to survive). Eric, are you still close to 100% BAC, or have you branched out at all? 60% now.

They purchased large positions in US banks in 2008/2009. They chose WFC and USB. I think they paid about $20 for WFC. Then in 2011 WFC went as low as $22 and they didn't purchase more, so I reason they are not interested in adding more to that sector yet (US banks). They added Bank of Ireland last year. Mr. Watsa gave a speech a couple of years ago where he described valued investing as purchasing shares when companies run into a "temporary" problem. Then the reiterated the word "temporary". Okay, now I can see where BAC's problem is "temporary" (legacy loans + interest rates), I can see where AIG's problem is temporary (interest rates), but I can't see where RIM's problem is necessarily "temporary" (need to keep inventing in a very competitive space to survive).

ERICOPOLY, I wasn’t talking about BAC. I simply won’t invest in mega-cap financial companies that I do not understand. No matter what their shares’ price is. If you understand BAC, the way certainly Mr. Berkowitz does, you will make a lot of money, along with Berkowitz and others. Glad for you! Instead, I was talking about market valuations. Fair enough regarding the overall market valuations. However, I replied with the BAC example because of your "greater values elsewhere" comment -- it sounded like you are surprised that others believe they are finding greater values elsewhere, so I wanted to illustrate for you an example in BAC. During mid-2006 through early-mid 2009 I was 100% in FFH (most of the time) -- but today, I literally believe there are greater values elsewhere: Nonetheless, I keep reading sentences like the following: “I sold my shares in FFH, because I found greater values elsewhere.” So I ask you: Why on earth won’t you be invested in Fairfax Financial in 2017?

My thoughts exactly -- it's been in large part a matter of recovery from a state of undervaluation. I put little faith in the buyback plan preventing a return to undervaluation. Many companies have buyback plans -- are they safe havens too? This buyback plan is unique. A pledge by the world's most respected investor to buy BRK "aggressively" whenever it drops below an objective price, 110% of BV. That's not all. BRK is lightly traded, perhaps about 10% to 15% of the proportional daily weighted volume/market cap of BAC, for example, plus a lot of cash on the BS to make good on that pledge. Plus the self interest of the Gates Foundation to continue to make good on the pledge when Warren is no longer at the helm to ensure that they won't have to make their mandated, regular sales of BRK at a price that greatly undervalues the stock. Light trading has long been a hallmark of BRK, including 2008 and 2009-- still the price fell. As the whorehouse burned, even BRK came running out . They can purchase only up to 25% of average daily volume though (I think that's right). Unless they do a tender offer, which he might. So the effective volume is 75% of what is already considered "light volume". It's weird though, in past years he said he would never try to support the stock -- nothing wrong with a person trying something new, if that's indeed what he intends to do. ORH was a lightly traded stock too. I remember when FFH sold more of their ORH stake and people thought it would be good for the stock as it would make it more liquid. I thought huh? Anyways, it didn't help the stock. But I think right there in the ORH annual report they stated something to the effect that more liquid would improve the stock performance. Anyway, less liquid improves it too? I don't know. I tend to believe that supply/demand sets prices, but I'm so naive I guess because I argued that point back when ORH shares float was increased and nobody agreed with me -- liquidity being more important because it would attract more serious investors, I think they argued. Or maybe ORH was unique because even so, it was still just a minority stake.

I think Berkowitz has been saying $2-$3. The funny thing is that even Mike Mayo was saying $2 per share last year. Oh how quickly they run after the stock drops (Mayo, not Berkowitz). I frankly have a low opinion of him, but here it is anyway: http://www.cnbc.com/id/41891291/Sell_Citigroup_Buy_Bank_of_America_Mayo "Bank of America — No. 1 — is you don't even need revenue growth for this company to earn to earn $2 dollars a share," he said, "No. 2, half of Bank of America is the old Merrill Lynch with a little bit more capital markets that's a very nice business fix. And No. 3, no question that expectations are low on Bank of America management team, but I think they can exceed what is already pretty low expectations," Mayo added.

To clarify: I expect EPS to move to at least $2 over that timeframe before taking into account share reduction. So the idea is that P/E will be no higher than 3.5x if the price hasn't changed. Right, so that is lower than the market has ever been, I believe... including 1982. But then I'm actually expecting it to happen in 3 years, so by 2015 I'm expecting to be holding a stock trading at 3.5x earnings per share if price still is stuck at $7. Others aren't quite so enthusiastic, but I figure if the company hits their 9% Basel III ratio at the end of this year and are then able to return AT LEAST 50 cents per share (dividends and buybacks combined), then by seven years from now I'll only have $3.50 remaining on the table per share, or far less than that (because I expect return of much more than 50 cents per share as earnings climb). Right, so $3.50 left per share -- maybe I now own 150% as many shares if I kept on reinvesting at $7. So I'm not scared of 1982 in 2019. Maybe it will hurt a bit if 1982 valuations happen later this year, or next year, but the odds of that are not certain. Keep in mind that BAC is nearly already at 1982 valuation. I mean it's hardly anywhere near these 22x Shiller PE10 ratio that's been casually tossed around. Sure, the Schiller P/E ratio scare is all about earnings profit margins reverting to normal. However, if BAC profit returns to normal then the stock goes sky high from here :D So look, mean reversion is basically the last thing I fear.

I might mention that Fairfax had hedges galore and a buyback plan during the 2008 period. Stock was dropping even as AIG cds hedges (and all CDS hedges) were soaring. Market just sells whatever is liquid. It all burns.

My thoughts exactly -- it's been in large part a matter of recovery from a state of undervaluation. I put little faith in the buyback plan preventing a return to undervaluation. Many companies have buyback plans -- are they safe havens too?

Buffett put? The stock is up more than 70% since the 2009 lows. I didn't know the IV was growing that quickly! In other words, the market can still knock it down from here.

So, what if Jeremy Grantham is right, what if Hugh Hendry is right, what if John Mauldin is right, what if John Hussman is right, what if many other “macro-guys” are right, and in 2017, or 2018, or 2019 will be 1982 all over again? And a new secular bull market will be finally launched? By 2019 I expect BAC to have earned $7 a share even if their earnings never improve from here. However I expect the earnings per share to more than double by 2019. So I hope they are able to find values again. I have found what I need, I don't care if they are right or wrong. I wish them success as well. Hope their ship comes in. In fact, I expect BAC to be much higher in 2019 when their ship comes in, and then I can sell and plow the proceeds back into other cheap stocks that will be everywhere to be found.

That's the optimistic projection. The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans. This includes the potential loss of principal if interest rates increase a lot. Cheers. :) A few weeks ago your pessimistic projection was that they still need to raise more equity, so it feels to me like you are actually getting more bullish. Actually, I'm a optimist. I do think, however, that BAC and many other TBTF banks could take a lot longer to work out than many assume because the world is in a super credit cycle crunch. There is no way out other than stagnation, default, or inflation ( default by a thousand cuts ). For the US, my bet is stagnation followed by stagflation. That's more optimistic than what Europe may experience. :) I just think that if the stock stays at $7 and they keep on earning $1 per share (the falling expenses get eaten up by negative revenue developments), hey, 14.5% isn't a bad earnings yield. Fine, torture me with beautiful women wielding feather dusters. Yet the future I think will be better than that.

That's the optimistic projection. The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans. This includes the potential loss of principal if interest rates increase a lot. Cheers. :) A few weeks ago your pessimistic projection was that they still need to raise more equity, so it feels to me like you are actually getting more bullish.

JPM is currently approved to return roughly a 10% yield on tangible equity -- before they cancelled their own buyback over the Whale tempest/teapot thingy. BAC returns 10% of tangible equity under a similar approval and that translates to nearly a 20% yield on the current market price.

So if they are at 9% will the Fed let them, in theory, return 100% of earnings to shareholders? Moynihan previously said about 1/3 retention, 1/3 buyback, and 1/3 dividend. But if the economy is in doldrums and there's no loan growth, then why not return it all?