ERICOPOLY

Hahahahahahahahahahahahahah Yeah, that would go over really well on the national news -- Obama orders it an emergency and uses national funds to restore $3m homes in Montecito. Well that was NOT a joke. Ok my use of the acronym FEMA may be incorrect. But when the fed government approves $3.5B in assistance to repair earthquakes, the fact that the funds are helping multi-millionaires in their beachfront condo is hidden from the taxpayer. That's my impression what happened in the 1989 quake. I just saw one article that said California paid $1B, and the Feds paid $3.5B, and elsewhere I read the cost of the quake is $5B. So there you go, seems like the math says the damage was 100% borne by the taxpayer. A friend of mine (when I was in high school) lived in a Los Altos Hills home that was knocked off it's foundation. No FEMA money. It was the Loma Prieta earthquake.

That wouldn't be allowed in Montecito.

Hahahahahahahahahahahahahah Yeah, that would go over really well on the national news -- Obama orders it an emergency and uses national funds to restore $3m homes in Montecito.

Only to the extent that you have equity in the home is it your liability (it's somebody else's liability now if you have no equity in the home). I'm not sure there are many people anymore with 0% equity in their homes -- my point (I think) is valid as long as there is somebody with little of their personal wealth in the home, who is contemplating tying up the bulk of their wealth in the home (paying down a huge chunk of mortgage). My point was that if you have no equity in the home, then you have none of your own money at risk in the event of uninsured damage to the property. I'm assuming a non-recourse mortgage here -- you just turn in the keys to the bank and walk away. You lose only damage to furniture and belongings (and hopefully no injuries).

I'm renting. I signed a purchase option in July 2013 -- expires in July 2016. I view the non-recourse language in the mortgage to be a nice way of protecting yourself if you can finance as much as possible of the property (preferably 100%). There's nothing risky about zero-down mortgages. They are in some ways less risky as you have nothing at risk (no risk of house price declines, no risk of uninsured losses, etc...). Unfortunately, they became hard/impossible to obtain after the crisis. It's like having a put, sort of (you suffer only credit ratings hit if you walk). EDIT: I forgot to mention, I made my landlord purchase earthquake insurance as a condition for the option agreement. I was worried that he might not be able to rebuild a damaged home, making my option worthless in the event of a serious earthquake.

Paying off the house has some risk as well, although very small. House burns down and your insurance company is insolvent? or You don't carry earthquake insurance? Maybe you thought it wasn't necessary in Seattle? I think for example most in Seattle do not carry it, although there is a risk of a large quake there. I don't know where he lives, but I'm familiar with Seattle. Even here in California many don't carry it. I presume the mortgage is non-recourse... that can be very handy!!!! Although not very likely. Kind of like a basket of munis being worthless is not very likely.

The issue is I'm having a hard time finding stocks with a large discount to fair value right now without a lot of risk (I'm not really looking to put all our cash into companies like SHLD and JCP that have the potential to be insolvent within a few years). If I was in the same position in 2007 this putting the money into stocks vs paying off a mortgage wouldn't be a question. What's your tax bracket? I'm assuming you have a 30 yr mortgage... So invest in tax-exempt muni bonds -- maybe 7 yr duration. Here in California your after-tax mortgage cost would be lower than your tax-exempt muni income (our tax rates go all the way to 50%). Then in 7 years, you can reinvest at (likely) higher interest rates. Maybe even Treasuries will yield more than your mortgage 7 years from now. Then you'll effectively have a mortgage with negative interest rate!

I was in a similar position in 2006. I had about $200k to invest in my taxable account -- this money had come from selling a rental property. I had a home mortgage at the time (only about 10% equity in my primary home). The $200k was enough to pay off 50% of my home mortgage debt. Instead, I sunk the entire $200k into Fairfax calls. Well, good look with whatever you decide to do.

We don't think our current house will be our permanent house, and will likely try to sell it in probably about 3-6 years from now, but we're not sure about that. How would you afford the next house if all of your money were sunk in the current house? Get a cash-out refinance? A HELOC? Sell the one you own before buying the next one? Does this put you in a hurry to buy the next house after selling the first? Does it mean you need to get a bridge loan to buy the next house -- sellers don't like that so you might lose out bidding on the house you want. Seems like a pain in the butt.

Let's say you made that statement two years ago. Since then, mortgage rates on the 30 yr have climbed significantly (30%?) as did housing prices (20%?). So from this point, for the statement to continue to hold true... housing needs to drop 30% from here if mortgage rate climbs another 54%. A 30% drop is almost as big as what happened in the Great Depression.

The name wasn't in the BofA database. It was an offer through a 3rd party's database -- a national Honor Society. She's been an honorable slut apparently since 2004 in their database.

;D ;D ;D Ah! Well, you have a good point!! Though, I was thinking more about something like “confidence in the management of a business”… Gio They don't have to be dazzling to earn 13% on tangible equity. As for the risk of them being too aggressive (trying too hard to dazzle), that's where put options are handy.

Let me put it this way: if you truly had your “just 10 investment in life” scorecard, and you truly knew the stock market would be closed for the next 10 years, were you still interested in Citigroup? Though I know that mind frame is way too rigid and will surely make me overlook many great investment opportunities (like C probably is today), I cannot escape from it… Guess that’s just the way I am and my brain works… No wonder, Eric, my returns are so much more lackluster than yours! Gio Since you asked... how well is Fairfax going to do in a severe Depression if the markets are closed for 10 years and therefore they can't trade their hedges? Do they just expire worthless? How do you make 15% gains in book value when they can't buy and sell equities for 10 years?

A couple of days ago Citigroup would be trading at 15% operating earnings yield if they can earn 13% return on tangible equity. I see that as the more likely outcome. Plus, the market will put a P/E on operating earnings, so there is a lot of room for valuation expansion. Easy to see 20% returns from Citi for the next several years. I find it much harder to make that sort of case with Fairfax, even if it made 15% returns on book, because the market wouldn't value the earnings in the same manner (due to their nature as capital gains).

I don't think so. The hedges are for providing losses to temper the gains on the the stocks in their portfolio providing gains to temper the losses on the stocks in their portfolio. Potential upside from equities begins after they've dropped the hedges -- until that point, the gains would likely be on the bonds and other things they may have (like potentially the deflation CPI thingies).

Hey, don't feel bad about owning Citi today. At least you didn't own Berkshire (down slightly more than Citi). MBI did great though. Some analyst mentioned that Puerto Rico downgrade won't be so bad.

It sold for about 10x earnings in 2006/2007. I remember this well because Bill Miller was spotlighted in a Morningstar article/interview where he was saying that if he wanted to own a commodity, it would be "C". Commodities at the time were hot and he thought he was clever buying C because of the low P/E. Banks like C and BAC today achieve their earnings with far less risk compared to then, and consequently I think there should be a risk/adjusted increase in the market P/E for the same dollar of earnings. The market will value banks based on earnings, not book values, and they will assign a P/E based on what amount of risk achieves those earnings. So far the biggest risk I've seen for a bank is the dilution risk (that is, if they can even raise capital -- I'm talking about the risks to the banks that don't completely go under) -- most of the hit to C and BAC's stock price since 2007 has come from dilution, not loan losses (helped by the fact that "bailouts"/intervention let them survive). So now that they hold a lot more capital (and they are forced to do so by the regulators), that risk is massively reduced. Needless to say, their funding models are also much cleaner (greater reliance on deposits instead of wholesale funding and LT debt). And risk has been reduced in many other ways (better terms on loans, better collateral backing RE loans). Nobody can argue that $1 of earnings achieved in a high risk manner will get the same market multiple as $1 of earnings achieved in a relatively far less risky manner.

Single-issue downside risk is what I'm trying to limit. An example: Fairfax restatement of financials in July 2006 due to mistakes they made in currency translations (who would have expected that???). I like concentration in the banks right now. Some don't, I do.

The original inspiration for the construction of this BAC portfolio was when I held the class "A" warrants a year ago. The warrants have this feature where they give you credit for the dividend, but it is a non-cash dividend. However, the IRS taxes it the same way as it taxes cash dividends. So you have this decaying put premium embedded within the warrant, but you can only implicitly deduct it from your capital gain when you go to sell the warrant. All the years along the way, you have to pay this dividend tax -- and the tax rate on that goes up to about 33% in California. So I decided to reconstruct the warrant using the common stock with portfolio margin and puts. Then, I can deduct the puts every year and not get the dividend tax. I can play games, like take a tax loss on the last day of this year on my expiring BAC puts, and defer the gains on my JPM,C,SHLD puts until the very next trading day (the next tax year). So by doing this I can move a tax bill out to a future year. Plus I can move the strike price up on the puts, as I recently did (moving from $12 up to $15 strike). That's something you can't do with the warrants. So anyways, it's very very very very helpful I have found to really deconstruct all of this stuff. You really get intimate with the risk so you don't wind up with that head-in-the-sand cognitive bias I mentioned (where you treat highly leveraged positions the same as if they weren't, and where you make the second mistake of not counting up all the time decay you expose yourself to on a net basis). IMO, I benefit from keeping my eyes open to exposures -- the risks.

It's raining here, in Santa Barbara, despite the drought. This is a sign that the Seahawks are going to carry the day.

Whoa. Who did you choose to manage your Roth? Roughly 30% with Sanjeev&Alnesh (MPIC). The rest I decline to say.

It's worthwhile to think the IRA strategy through to it's final conclusion. (if you are really successful compounding it )-- you wind up just racking up too much of an estate tax liability once you reach a certain point, even though it is meant to be "tax free" in the Roth. I hit that point recently and then (after it fell back 10%) I decided that it would just go back up to that level soon enough and I may as well just stop trying to grow it myself. So I turned it over to the pros. I don't manage the Roth anymore (as of two weeks ago). I still expect it to rack up this tax liability higher over time, but I think the management of it is now lower risk -- and since I can't keep as much of the gains, I think the risks should be lower as well. Plus, this is lower stress for me -- a lot lower! I can instead give money to my kids through a tax-advantaged indexing strategy (like a variable-annuity held in a Crummy trust). Their eventual taxable gains on that will likely be lower than today's inheritance tax rates (which I assume to not go down with time). However, I still haven't established any such trust for them. Not sure if I will... just pointing out that from a tax standpoint, the Roth probably no longer has an advantage over the Crummy trust approach when you take into account the inheritance taxes and assume a low-risk indexing strategy.

Isnt that obvious? Like what happened in Volkswagen. A margin call could turn a 5% exposure shorting Volkswagen into a 100% loss on the whole account. Personally I never use leverage/margin so its simple for me. I also don't think the person who started the thread was thinking about weighting using leverage. Damn right it's obvious that portfolio weightings need to be expressed while taking notional leverage into account. You either have notional leverage, or you don't. The Mohnish system is for unleveraged -- add some leverage through derivatives, and it changes things.

You could have 10 positions (BAC calls, GM calls, KO calls)... etc... where each is at-the-money calls. You actually have a 100% loss potential from the passage of time alone (until expiry). So you need some sort of framework to think about option position sizes if you hold options. I don't think you can use the same rules as you use with common stock. My framework is to think about how much net time decay exposure I have (netting out premiums on options I've purchased against premiums on options I've written). Then I further think about (if I'm dealing with in-the-money calls) how much leverage I have to the downside price movement in the underlying stock. Suppose I have 2x leverage in deep-in-the-money calls -- I think of that more in terms of a 20% position sizing rather than a 10% position sizing. Otherwise, I'd fool myself into believing the position is smaller than it really is (you quickly realize the mistake if the stock drops and your losses look and feel like they are twice as deep compared to the unleveraged common). Now, if you want to grin a bit from the irony of it all, somebody else on this thread urgently wants you to think about it as only 10% exposure (so that you don't suffer unknown/unexpected risk from a complexity-induced bias! LOL, his approach leads to a "simplicity-induced" cognitive bias for the reason mentioned in the second sentence of this paragraph ;)). You don't blindly take rules designed for uncomplicated things (unleveraged strategies) and apply them to complicated things (leveraged strategies).

I don't get why weightings is complicated. Out of 100% of your portfolio how much are you allocating for each security? What has weighting of security in a portfolio got to do with capital at risk? From your example. I can have 10% in SHLD and 10% in BAC and that's my weighting. You can have 10% in SHLD/BAC + Puts at 26% or 10% of strike so your weighting is 12.6% for SHLD and 11% for BAC. My risk for both is I can lose 100% and your risk is you lose 26% and 11% so what. The question asked by the person who started this thread was "How you weight your holdings" ? 1. Equal weight like Mohnish Pabrai 2. Weight by relative Value or upside like Bruce Berkowitz 3. Weight by sector The first option is "equal weight like Mohnish Pabrai". I think you'll find that he doesn't purchase short-term call options in his funds (including LEAPS, although he was able to purchase GM warrants in one of his funds). He has this 10% weighting in order to be able to limit single issue risk. So you are cheating the system if you hike up the single-issue risk by purchasing calls. You still have 10% max exposure, but a much higher amount of risk on that 10%. It's not really the same thing at all as what Mohnish is practicing. You may think you are playing within his framework of rules on position sizing, but not really. You need to go back and think about why position sizing exists in the first place. It could be a system of risk management (for the downside). Right? So doesn't the position sizing change when you use derivatives to hike the risk through the roof? This is why I'm encouraging you to think of position sizing in terms of upside/downside exposure. Look through the derivative and see what it represents on the underlying side. I'm talking about unleveraged downside, so that it's apples-to-apples comparison with the type of unleveraged downside that Mohnish it talking about. You have to ignore another person on this thread who is pleading with you to treat a derivative like it were common stock when you choose position size. You can't just refuse to think about the look-through leverage (and the premiums/costs you pay for it) under the banner of avoiding complexity. The complexity is already there unless you have a rule not to own derivatives -- once the derivative is owned, you don't reduce it's complexity through refusing to think about it. It takes a bias to believe that ignoring something makes it go away -- a false sense of absence of complexity (out of mind, out of reality?). So let's say you have at-the-money position size of 10% in call options. You can lose the entire 10% from time-decay alone! Now, are there other places in the portfolio where you'll have an offsetting profit from time-decay? That's what I'm doing -- I'm netting out my future time-decay risk (I purchased premiums, and I sold premiums), and then asking myself on a net basis, how much time decay exposure do I have?