ERICOPOLY

The last two have been easy to see in real-time. You suddenly had grocery stores putting ".Com" on the end of their name. I remember when the local Albertson's became Albertson's.Com. You had commercials on TV for ETrade where the teenage boy was landing a helicopter on his parents' suburban front yard. You had people earnings 6-figure salaries if they could code in HTML. Remember some of those valuations? MSFT was at 70x earnings. I think even KO was in excess of 40x earnings. Then in real estate you had lending in excess of 100% of the homes value. No documentation loans, etc... People new to real estate investing suddenly owned 4 or 5 properties with excessive leverage that were appreciating 20% a year. New housing construction well ahead of household formation -- oversupply building. This wasn't that hard to spot. Not like today, anyway. Where is the common man on the street today earning easy money? Who is lending to him excessively? Where are new college graduates earning 6-figure incomes with limited experience? Who is getting rich quick today, what sector?

And the nation's automobile fleet is about as old as it's ever been. There is a lot of deferred replacement that's yet to kick in.

The 2007 stock market crash was triggered by an economic crash. You had all the people borrowing against their homes, you had overbuilding of housing units and the accompanying economic boom... then all that vaporized way too fast. Right now, I see underemployment. I see no special amount of borrowing against appreciated assets. Housing is still underbuilt on an ongoing basis versus trend household formation, and so if anything we're still getting a negative headwind from real estate -- or at least far from a tailwind. So the jobs keep grinding back. There isn't a big balloon in the economy about to burst.

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago. You buy them for the next ten years' and beyond. What happens when your estimates of their future earnings power is incorrect? I thought this was a value blog. I love your comment :-* :-* :-*

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago. You buy them for the next ten years' and beyond.

Why did Cheviot Savings Bank need a $62 bailout?

You are over analyzing the situation and should reconsider your priorities. In twenty five years in the business, I have seen hundreds of bright young people, often from great schools, get nowhere in the finance field because they choose to "strategize" their career path instead of responding to opportunities. I remember laughing at 25-year old Ivy League MBAs who didn't want to run financial models because they feared being pigeonholed as a "numbers guy". They wanted focus on the "big picture". In two years these empty suits were gone. They go it backwards by thinking that the firm was there to serve them. This new fund is a critical test for you. Ignore the assurances from your superiors that this is your choice. It isn't. If you say no, you have put yourself ahead of your firm and for that there will be consequences. Maybe not tangible way, maybe not immediately, but people will take note and it will happen. The bottom line is this: you should take the job and work your tail off with a positive attitude to make it a success, or leave the firm. The best way to advance in your career is to gain a reputation as a "can-do" individual who will do whatever it takes for the benefit of your current boss and your firm. Once you succeed here (and it will take many years of effort), opportunities will follow. Lots of them. When bosses start to fight over you and you start to get job offers outside the firm, then you are making good progress! That is basically how the world worked at Microsoft from what I can tell, so it is probably a general corporate truism of any field.

You can raise crickets in a box in your apartment. Don't need green pastures for protein :D +1 but eww. :o Then no Chocolate Chirpie Chip Cookies for you! http://www.ent.iastate.edu/misc/insectsasfood/chirpie.html

You can raise crickets in a box in your apartment. Don't need green pastures for protein :D

We already did that. Last week it traded down to 3 cents above tangible book value. Look at a 1 yr chart -- it was right about now a year ago that it took off. http://finance.yahoo.com/q/bc?s=BAC+Basic+Chart So, been there and done/doing that.

He could have bought a lot more, and he still can. Can't he buy until he gets up to a 10% total ownership stake?

During the summer of 2008 I read one of Jim Cramer's books. The only interesting thing I found in there is that a trader once taught him to periodically just sell everything, go to 100% cash. Then, reconstruct the portfolio. The idea being that you tend to hold some positions just for psychological reasons that are no longer there once you are in cash. It clears your head was his point.

Not behaving purely rationally is being human.

Suppose you fat fingered when you were logged into your account and somehow instructed the broker (by accident) to sell everything. Then you would be in cash. Are you saying you wouldn't buy back everything you currently hold once you realized your mistake? If you would, then you are a buyer at these prices, obviously, because you would in fact be buying at these prices. And wouldn't this be true at any valuation? On any day that such a fat fingered mistake is made? Taxes aside of course.

What I meant is that you could swap that 20% position for cash. Then you would be in cash, with no position. But you choose to hold a 20% position, so you implicitly are saying that if you were in cash today and held no position, then you would be a buyer of a 20% position at the current prices. Therefore, if you hold then you are implicitly a buyer of that 20% position at these prices. That's all I'm saying :) Thus, if the management is to buy some shares back, you can hardly fault them as you yourself are also a buyer (implicitly) of whatever you hold. Unless of course you only hold for tax reasons. And if you don't want more ownership of the same company for allocation reasons, you just sell an offsetting amount and get the cash without paying as much tax on it (unless you are Buffett).

The government could offer the inflation-protection feature of TIPS on all Treasury bonds issued, but they don't. Hmm... why? The government calculates CPI, but they don't give you a deduction for inflation losses when you report interest income. Why? Why does the government tax you for the inflation adjustment offered by TIPs? These would be simple things that the government could do with a stroke of the pen without resorting to going back on the gold standard. It would mitigate, but not entirely solve the losses from inflation. But I've never heard any of these proposals. It seems like... inflation is one of the main policy tools to redistribute wealth. You know, we hear things like Mitt Romney only paid 17% tax on his income. But what if his income were fixed and he earned a 2% yield in a 2% inflation environment. Didn't he (under that scenario) really give up 100% of his income in a wealth redistribution?

Well, that's the trouble. Meanwhile, I'll do my best to defer the gains until I can claim tax residency outside of California.

So you don't take any short term taxable gains? Then I can see your point. Yes, if I'm selling a short-term holding to offset a dividend then I pay a tax rate that puts the dividend at the advantage. At that point, I wear Buffett's hat and declare a Jihad on managements that don't do what's best for me when they buy stock at high prices. You just have to look at his incentives to predict what that man is going to say. But then I settle down, because the bulk of my holdings are long-term and with my expiring puts they wipe out any such relatively small short term capital gains. So then I take Buffett's hat off and once again remark how buybacks are the most democratic way of returning cash to investors.

I have a math degree and you have an engineering degree. Somebody who knew only those two things about us might guess that you probably prefer doing things by a process so as to be ISO9000 compliant, whereas I make decisions based on whether 19 is less than 33.

The first three things you say, (#1, #2, and then the following sentence), indicate that you might as well buy your current holdings even if you presently didn't own them and held cash instead. The last thing you said doesn't make full logical sense because you have elected not to mention that you can sell an offsetting amount of shares and therefore get your cash all the same without altering your percentage of ownership in the company. So this argument that you wouldn't be buying MORE is irrelevant, because you are free to manage your percentage ownership of the company. Plus, I said if you hold it today you could go to cash and buy it back -- that has nothing to do with MORE. It is all about SAME.

I also employ a methodology of buying puts instead of selling appreciated shares. Then as the puts expire worthless I can take the tax deduction to begin to reduce holdings. So while I can't dump the entire holding all at once without tax consequences, I can certainly lock in the value all at once without tax consequences. Unless the shares don't have options traded, but currently I don't have that problem.

In truth, this is not fair: not much of what Mr. Buffett does is very relevant to any of us… Ok, I admit that! Yet, an entrepreneur is content to be “vaguely right”… When he finds a good business, he sticks with it, unless its future prospects go irremediably south, or he is offered an obscene price. And the reasons are very clear to me: 1) the knowledge and the experience of everyone are definitely limited, 2) valuation is not an exact science. And in the long-run I think it is far better to hold a slightly overvalued share, which you know in the end will take you where you want to go!, than to constantly run the risk of making very costly mistakes. But the fact that I might be willing to hold a slightly overvalued share doesn’t mean I would be buying more at those prices, or that I would like management to do that in my stead. Gio And assuming that ERICOPOLY bought at a good price originally, and taking into account the fact that he says he is paying about 50% combined state and federal taxes in taxable accounts. It would seem like in making capital allocation decisions he would have to take that into account. 1) By selling at full value he reduces his profit by that rate? 2) He says that by holding the stock you are implicitly saying you are buying that stock today. So would that mean you would be immediately taking a loss when you factor in taxes? You are right, I do have to take taxes into account, which changes the calculus of dumping the entire holding. But it does not change the calculus of dividends versus buybacks, because dividends will always be the worse option that destroys more value (unless the cost basis of my shares is $0).

My long term capital gains rate is 33% (same as my dividend rate) and it is only on gains portion. So take BAC... which I bought at "good prices". My shares might have a cost basis of $6, and today the stock is at $14.50. So I have a gain of $8.50 per share. Dividends: Now let's say they pay $1 of dividends. Okay, my tax on that is 33 cents. Buybacks: Instead, they buy back shares and I sell an offsetting amount. My tax on that is 19.33 cents. So less value is destroyed by repurchasing shares. Unless you pretend to claim that 19.33 is greater than 33.

;D ;D ;D So, Eric, you don’t see a situation in which you hold a stock, without adding to that position as soon as you have cash available? Maybe, you are right... The problem though is the difference between theory and practice: in practice almost no one behaves like you are suggesting. So trying to be practical, and engineers are always practical! ;D, I will be content enough and even very pleased, if management buys back shares when they are undervalued, and refrains from buying back shares when they are overvalued… ;) Mr. Buffett buys back under 1.2 x BVPS, and yet doesn’t sell one share of his, even when the stock trades above that price. Does he? And he is not an engineer! ;D ;D ;D Gio Humans are capable of writing down pure logic, and formulating purely logic thoughts, but they are not capable of executing investments in a purely logical manner.

This is a really strange way to look at it… It is as if, instead of thinking how to use the new free cash my businesses generate, I would be constantly looking for someone who might be willing to buy those businesses from me… Yes, I might consider to sell a business… but only if it becomes extremely overvalued! This certainly doesn’t mean that I am going to put all the free cash generated by that business back into it! This is clear, isn’t it? I have never done so, and I will never do it… yet, I don’t sell my businesses! Exactly like it is for my businesses, also for a stock that I bought at BV and that can compound at high rates for many years into the future, I am willing to stick with that business through all the ups and downs. (Unless, of course, it becomes extremely overvalued!) This doesn’t mean I will add to my holdings on the ups… right? Gio A company repurchasing it's shares has absolutely nothing to do with plowing money back into the business. It is merely returning capital to shareholders. Shareholders who do not sell an offsetting amount are responsible for their increase in ownership at those prices. Like it or not, it's your personal responsibility as a shareholder to sell the offsetting number of shares if you think it is overvalued. But you might as well dump the entire holding if it's overvalued, no? And yes, you can be fully in cash on any given day provided you hold relatively liquid stocks. The fact that today you aren't fully in cash is an indication that you are a buyer of those shares at these prices today. It's just "tough cookies" if your mental psychology blocks you from seeing it that way, but it's the reality nonetheless. Nobody ever accused an engineer of being logical ;)