ERICOPOLY

I didn't realize there was no long-term period. I have never actually stayed in put contract longer than 12 months, but always thought the tax treatment was there. Disagree though on the reasoning -- in addition to the cash, the liability is also received on day one. Holding the cash up front eliminates counterparty risk, but does not mean you won't lose your shirt. The capital gain only happens when the liability is lifted... and if the time period is long term, then we get the phrase "long term capital gain". Sucks that the law doesn't actually follow the logic as I see it. I will need to change how I hold this -- move it to my Roth.

I wrote 2012s for tax reasons -- didn't want short term tax penalty.

Yes thanks for posting. I followed him into AIG last week ($45 strike puts for nearly $20) -- they put me up 40% right out of the gate with opportunity for another 28.5%.

I agree. I disagree. Some can be attributed to luck. Some is strategy. If you are not prepared you cant take advantage of luck. Several of us on this board (actually its predecessor) bought FFH leaps in 2006. I did then, and repeated it in 2007, 2008, and 2009, and have massively leveraged the gains in FFH stock. Like Eric, though, it is no one trick pony. It is more formulaic. Somehow one learns to identify the opportunities. Of coz, I didn't mean only luck was involved. Smart ones will stop making this all-or-nothing bet after a while... some wasn't smart enough to stop and ending up in a disaster. First-hand experiences here. Eric is smart enough to admit he lucked out. With that in mind, I am sure he will continue to be a successful investors for years to come. Over-confidences can kill! On the other hand, you could say that Ericopoly made a skilled choice to view his ROTH investments in the context of his total assets, which included the value of his future earnings. If he played that way with all his assets, in addition to taking on recourse leverage, then we could fairly say that the guy just got lucky. I found the link last night where they provide a consolidated return for all accounts. It is +64.36% going back to 2003 for a cumulative +3,265.95%. But yes, when I was born in 1973 the top income tax rate was 70%. Now we're at 35% maximum tax rate. So I've been trying to grow that Roth account the fastest. Including my wife's Roth account, we're at 43.85% of total consolidated assets are now in the Roth. My FUR holdings are in my wife's Roth. My bank holdings are primarily in my Roth. My FFH.TO is 100% in my taxable account. My living expenses are funded out of my taxable account. I haven't worked in two years but I am getting off my butt and am starting a software consulting business -- using that money I can begin to grow my taxable IRA once again, or further fund the Roth. If I can make 100k doing consulting, I can put 35k annually into a solo-401k and a further 10k into IRA (including a contribution for my wife). So that's 45% of income I can defer tax on and grow for a long time. I'm glad for the RothIRA given where I think taxes are likely to be heading (up).

I could change my moniker from ericopoly to FittyCent (get rich quick or die trying). Or maybe to GeneralPowell (Doctrine of overwhelming force).

Reduced. RothIRA leveraged 1.15x.

I agree.

I had $5,000 when I started at Microsoft in 1997. It went up a whole lot due to stock options (to about $500k) but I cashed out all I could (after a significant crash) about $80k in May 2001. I did not put that money in stocks, but rather bought a house. Then another house and another. The housing market went up, I made money, and sold a house (one I was renting out). I got a line of credit on the first house I'd bought (but no longer lived in) and used that credit line (in addition to the money from the house I'd sold) to buy FFH calls in 2006. I also put 100% of my RothIRA in those calls, but my RothIRA at the time was only 7% of the size of my Microsoft 401k plan so it was truly peanuts in comparison. My Microsoft401k plan was locked down so that I could only invest in a truly limited selection of mutual funds and Microsoft stock. When I quit that job in January 2008, I took the money out of that company plan and put it in a Fidelity Rollover IRA. Then I rolled that money into my RothIRA, 1/2 in Fall 2008 and the rest in 2009. Then my 2009 contribution was disallowed due to income once again (capital gains) and so I had to wait until 2010. That was very costly -- I should have rolled the whole amount in 2008. So anyways, for years I had a 401k plan with Fidelity and they always computed gains accurately, accounting for the regular contributions that one makes every paycheck in such a plan. I assume they are using that algorithm for computing returns for the rest of my accounts now.

They are doing something different at Fidelity. I rolled over to my RothIRA a sum of money (at the beginning of this year) that amounted to a boost of roughly 40% in the assets of the account. However, the so-called YTD return for the account is calculated as 16.8%. In truth, the account is up roughly 30% if you include the March gains (I hold SFKUF, C, BAC calls, and WFC in the account... and last week added SSW a bit below $10). The computation for YTD in my RothIRA is accurate for 2010 despite the roughly 40% boost from the rollover contribution. I would assume the algorithm would therefore be equally accurate for the rollover contribution I made in 2008. The only other contribution I made was in 2004 (I think it was a whopping $4,000). I was disallowed a contribution in 2005 due to income restrictions (it is after all a RothIRA). Now, as for the other account, I have been sucking money out of it -- in fact, I have now withdrawn nearly all of the money from it because I moved it to Interactive Brokers so that I could margin my FFH.TO holdings. So if they are counting contribution/withdrawals as "performance", just imagine what it would have been without those withdrawals!

That was my thinking in 2006 -- I figured a total wipeout would mean I retire 2 years later than otherwise.

The results of both accounts are heavily influenced by the mid-2006 opportunity in FFH call options. The RothIRA is influenced by how I've treated it. Whenever FFH tanked I added leverage through more call options, and I would load these into the RothIRA so after an expected recovery in FFH price I could then sell it to reduce my net leverage free of taxes. It was leveraged heavily before the short selling ban, then I sold out completely in that account after the rally and held a high percentage of cash in that account for a while... meanwhile I hadn't sold in my taxable account so it was getting clobbered last Feb/Mar while the RothIRA was where I once again loaded up on my FFH calls with leverage. Then I sold my FFH in that account last summer after the rally to $335 and proceeded to stuff it disproportionately with ORH calls last year before the buyout, so the day of the announcement my account rallied 60% or so in one day. Then when I bought FUR last year I stuffed that account more than 70% into FUR near $9, then sold in January near $13 and bought C, adding another little pop. Meanwhile, my taxable account is being left in the dust. A lot of one-way bets with leverage. This could very well have ended very badly, which is why I'm ready to admit there is a large amount of luck involved. Now, the FFH opportunity didn't happen until 2006 but I'm reporting the numbers going back to 2003. If you start in March 2005, the annual rate of return is 141.99% and if you start in March 2007 it is 165.29%. Starting in March 2009 it is 309.64% and YTD (defined as until 2/28/10) it is 16.8%. Those are the only time periods for which they allow me to calculate the return. They take into account contributions and withdrawals -- so the numbers aren't fudged. There is another boardmember here who has done about 10,000% since mid-2006. He was working for the same employer as me in 2006 and retired (at age 25) later that year. That came from FFH calls. Since then, he loaded up on Chinese microcap stocks last year and posted that his portfolio had a P/E of about 1x. Then the multiples on those stocks have exploded since and that's been his second major tailwind. Anyhow, I wish I had copied him last year.

After logging in, it takes me to a page "Account & Trade" where there is a "Summary" tab. This page comes up as the default after logging in. For each of my accounts it states the dollar value "Account Balance", and in the next NEW column over to the right there are hyperlinks for each account "See rate of return". You click that link and the rate of return comes up.

For those of you who are using Fidelity, they have put out a cool new "rate of return" link for each of your accounts. For the period 2/01/2003 to 2/28/2010: My RothIRA has compounded at 118.51% annualized for a cumulative gain of 25,153.26%. My taxable brokerage has compounded at 53.84% for a cumulative gain of 2,007.36%. A couple of observations: 1) These kinds of numbers won't be repeated 2) I trade without tax considerations in the RothIRA, so I think that's why the performance is so much better

He didn't mention (but I find significant) that Citi only has 3% exposure to CRE and something like 50% of it's business is done in the so-called "emerging markets" (and I believe only 25% or so is done in the US). There has been some pessimism about shrinking pie for the big banks as the US consumer delevers, but that wouldn't really hold back Citi to a great extent.

"and liquidity is flowing out of M3 and into M2 and M1 as more investors go into cash" How do investors in the aggregate "go into cash"? Presumably, he means they are selling something but when something is sold it means that no more money is leaving the asset than is going in. Net cash is unchanged.

It partly seems too good to be true. You get all the upside from the stock but stand to lose only 20% maximum. It's like getting a put while at the same time a loan. Yes, that sounds a bit like an in-the-money call option except you also get the dividends (but you don't get them in the call option example). They must be hedging the stock at lower cost than the interest rate they are charging me. That's all I can think of. But then how are they hedging so cheaply? They also hold title to the shares during the loan period -- counterparty risk? Are they doing something like lending the shares out to shorts or something during the loan period for extra gain? That's why I thought somebody on this board might already have an understanding of how this kind of lender really operates.

yes, assuming he has the cash to cover the sale of the put...i suppose i should have assumed he did. The way that works is that writing naked puts to leverage the account eats into the accounts' margin borrowing power but does not actually amount to a margin loan, since the market is loaning you the money instead of your borrowing it from your broker. So lets say you start with one share of Berkshire in the margin account valued at $122,000 and no cash. You then write 10 contracts of a $40 strike put on Wells Fargo for $11.75. The account will now be leveraged but you are paying no margin interest because instead of the leverage costing you cash, it actually added $11,750 in cash to the account. You can then withdraw that $11,750 in cash and you still won't be paying margin interest. But you do have the margin buying power of the account eroded, and it is of course riskier because your broker can still get nervous and force a sale at distress prices in a meltdown. So, I was suggesting to hedge the additional WFC that you added exposure to with an at-the-money put. Cardboard is right though that it does put pressure on the overall margin risk of the account. And I am thinking of ways of financing a house. Like most people here, we've been through a "bumpy" stock market the past 10 years and I am looking at that carefully. At the same time, I don't want to sell my shares right now either.

They claim it is callable at 80% of the loan amount, not MV. So instead of 0.80*MV, it is 0.80*0.80*MV, where the loan amount was .80 of original market value. Here is the link where they describe that nuance: http://www.sbffunding.net/marginvssecurityloan

Has anyone a word of wisdom regarding synthetic loans? Example: 1) Write a deep-in-the money put for $30 in proceeds 2) Buy an at-the-money put for $3 to hedge out all risk You effectively have a $27 loan. The worst case cost of the loan is the $3 of hedging -- think of this as your interest rate. You could find yourself being PAID for the loan -- this will happen if the underlying security appreciates more than $3. If the underlying security appreciates by $30 for example, you are actually being gifted your loan by the market. Of course, if you get assigned you'll need to dump the shares and write deep puts again (not really that big of a deal).

Has anyone tried this? http://www.sbffunding.net/marginvssecurityloan http://www.sbffunding.net/sampleloan I'm skeptical because they claim I can borrow 80% of the initial security value and then only get called if it falls in value to 80% of the loan amount. Therefore, there is no call unless the market price of the stock falls to 64% of the original value. But because it's non-recourse, I could just walk away and keep my 80% loan right? Then I can actually increase my investment because I have 80% of the initial investment but I can buy it back for 64% of the initial price. Do I misunderstand this?

On Monday I had tires mounted at Walmart. I wasn't unhappy with the service. I had my winter tires pulled off and my summer tires put on. Mounting, balancing, etc... That's even better than I expected, but I had forgotten about winter/summer tires, probably since I had them on separate rims, so I could change them myself. I don't know if they let you drop sip the tires there like most shops would, though. Here is their tire service website: http://www.walmart.com/catalog/catalog.gsp?cat=495845 I won't be going to Les Schwab anymore. I was able to make an appointment at Walmart which eliminated the waiting around and of course the store is enormous so I was able to do shopping while I waited for my tires. Very convenient. At Les Schwab I would read my Kindle while I waited, but if you are busy and have things to do it's sort of a waste of time when you could be getting some shopping done instead.

On Monday I had tires mounted at Walmart. I wasn't unhappy with the service. I had my winter tires pulled off and my summer tires put on. Mounting, balancing, etc...

I have the straight Citi shares, not the options. But yes, I've been guilty of watching the market price everyday this week :) I own options on BAC -- there was (and still is) hardly any premium in the $7.50 2012 BAC calls. Soros bought Citi in Q4. Given that he fled the Nazis, I think he thinks about risk more than many people give him credit for. It's just nice to see a big macro speculator type in it -- we already have Berkowitz, Paulson, etc... It brings more confidence to the market to see Soros I think (a lot of people follow his lead, as many do Buffett). I care about stock prices too much perhaps, but in my experience I've found it pays well to have price go up.

Perhaps this isn't quite luck, but what I've done is not terribly skillful either. I have a "what seems reasonable to me" mental filter that I consult when I listen to the various narratives out there. I don't really do much more than superficial analysis of the financials. The narratives I listen to (superinvestors who speak about their holdings, articles in the press, posters on this board) are weighted based upon what I know of the characters involved, and I apply them to the world as I understand it. This is different from some of you who try to predict future cashflows a lot. I've tried to do that kind of thing but I find it is too prone to narrative fallacy when I try it. So for example, rather than predicting what the IV of Fairfax is I'm just assuming that if they keep making 15+% a year then people will eventually catch on to the stock and bid up the P/B multiple really high. That's why I don't own many stocks and Fairfax is 50% of my holdings... it's because I don't have much faith in my own cashflow forecasting. I would probably wind up loading up on something like Lear a few years ago before it's decimation. I do have C, BAC calls, WFC, and FUR now to round out my holdings. I have some SFK that I got for 20 cents but even after the run it's still only 1.5% of my portfolio... see, could have done very well if I knew the business. So 12-18% compounding tax deferred from FFH is fine... anywhere in there will make me very happy vs striking out on my own too much. Some of you are staying away from C because you don't understand what is still in CitiHoldings. I'm looking at it much like the runoff situation at Fairfax a few years ago... the remaining operating businesses in CitiCorp is very good and that's the future as they are already far along the path of following the Volcker plan. It's 20% of my portfolio so if it goes to hell, there I will be with a big loss for investing based on my internal filter of reason vs strictly a more hardcore approach. With FUR I simply reasoned that they didn't have much more to lose (I invested at $9.10) based on the equity in most of their operating properties being marked down to zero. So if they can stay leased I can earn great returns if they also get their cash invested. It's not exactly rocket science level reasoning, but it may just work. SOLD.

I'm not sure what else to draw from that comment. He says it's unlike the rate will be maintained. Does he mean it's unlikely they'll pay as much as $10 again, or unlikely it will keep growing at the rapid pace of the last 3 years? Given our results for 2009, our significant holding company cash and marketable securities position, the availability to us of the free cash flow of our insurance companies now that our three largest companies are 100% owned, and our very strong and conservative balance sheet, we paid a dividend of $10 per share (an extra $8 per share in excess of our nominal $2 per share). It is unlikely that this rate will be maintained.