Munger

txlaw -- your decision tree re HPQ vs DELL led to the right conclusion for you. Congrats. To me, it was obvious HPQ was a disaster waiting to happen and I said as much in this thread well in advance, regardless of the perceived asymmetric risk/reward based on a superficial valuation analysis. At this point, given the stock price drop, I don't know if the current valuation reflects the struggles ahead for the company. I have no clue re Google/Motorola although I would have preferred they didn't make the acquisition.

Truly sad. Hoping for his health...an amazing mind. Although little know interesting fact is that Buffett and Jobs faced off on the merit of gold as an investment back in 1979. "In 1979, the stock market had gone sideways for a decade, the Middle East was boiling over, oil prices were through the roof, there was a meltdown at the Three Mile Island nuclear reactor, and investors were flocking to precious metals as a safe haven against rampant inflation. The world, it seemed, was ending. It was in this environment that Steve Jobs scored an appointment as a trustee at Grinnell College, a small liberal arts college with a legendarily large endowment. According to Schroeder, who cites an interview with Grinnell professor emeritus and board member Wally Walker, Jobs tried to persuade the board to dump all its stocks and put its money into gold. Schroeder reports (and the endowment's stellar performance confirms) that the college, which also counted Warren Buffett among its trustees, ignored Jobs' advice entirely."

txlaw -- what are you doing on the pro Dell thread...this is where the smart kids hang out...kidding -- glad to see we agree on something. Also glad to see rranjan is coming around after his HPQ debacle. He can redeem himself -- no doubt in my mind:)

The unknown part is how much their put back liability will ultimately be. True this is one part of the unknown. I can also guarantee that you and all other outside investors have ZERO insight into asset quality and the assumptions underlying the company's book value estimate. Just look at the absurdity highlighted by NHLB (which is the closest you'll come to seeing any "paint") -- no way any on the outside could have understood the complete absurdity unless publicly filed as part of the court case. In the SEC filings, you get the label describing the contents and that's all.

PlanMaestro writes -- I have not seen a credible short thesis and been trying to find one. I agree -- impossible for an outside investor to determine. No one on the outside can accurately analyze the assets and the assumptions underlying the company's book value esimate.

Parsard writes -- "Time will tell who was right." I share the spirit of the post but it's misguided in relation to me. My primary assertion is that none of the bulls have any ability to accurately determine the margin of safety in this investment or intrinsic value. I have no doubt I'm right in this regard although I've tried hard to prove myself wrong by attempting to flesh out the bullish case. I have no clue if the stock is going higher or lower from here because it is impossible to accurately measure the intrinsic equity value of the company. I'm honestly hoping the stock goes higher for those who own -- I would gain no satisfication from a BAC BK.

I guess if you take an unlabeled can of paint, shake it up well, then punch a hole in it... You can pretty well tell the color of the paint in the can even though you can't see all of the contents. No -- you're being shown the paint can and the label describing the contents but you haven't seen an ounce of what's inside.

How is my number any different than the same one Moynihan gives in that very article? Why do you edit out the parts you do not want people to see and only put in what you want them to see? "In March, at a presentation to investors in the baroque ballroom of New York's Plaza Hotel, Moynihan unveiled his audacious goal of earning as much as $40 billion before taxes by the middle of the decade. That translates into $25 billion in net income, far more than any non-oil company in America made in 2010." Cheers! Parsad wrote -- "but earns $40-50B in free cash a year to continue to meet its liabilities" Well excuuuuuse me for employing basic English language grammar rules to interpret EARNS in the present tense not an audacious mid decade goal. And also please forgive me for assuming that when Parsad used the term free cash he meant free cash not pre tax earnings:) C'mon guys -- let's not be so uptight...I wasn't trying to hold the dicrepancy against you just trying to ensure the right numbers were in the dialogue.

Awe -- you don't want to be hard on people. Everyone makes mistakes. Let's say for example...oh I don't know...how about someone is given a list of cheap tech stocks such as DELL, HPQ, CSCO, IMB, and MSFT. And let's say this person recommended HPQ over the other stocks, confidently extolling on the virtues of HPQ vs the others just before HPQ experiences an unprecedented implosion. (I can't resist mentioning that I did warn to stay away from HPQ at the same time). And let's say this same person has been recommending BAC since $11-12/share. Most would rightly want to ignore this person's stock recommendations because they have been so disastrous but that wouldn't be fair...gotta give the guy a chance to redeem himself. Even more, let's suppose this same person likes to pontificate on his subjective personal views about the role of luck in the world and how luck should be incorporated into the tax code. Some may not be as eager as he thinks to hear his subjective personal views on a topic completely unrelated to stocks but I still don't think it would be right for everyone to ignore the poor guy. After all, the value of an investment board is in part related to the diversity of opinion no matter how foolish at times. I personally believe rranjan can redeem himself...no doubt in my mind.

I may not have done my homework:) but seems there is a HUGE difference the $40-50B in FCF Parsad expects and the $25B future annual net income (which sould be a reasonable proxy for BAC FCF) Moynihan expects. Just making the observation. "Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets" http://finance.fortune.cnn.com/2011/07/07/can-brian-moynihan-fix-americas-biggest-bank/ And I agree w others -- the article presents Moynihan in a favorable light...will be interesting to see if he lives up to his words in this article.

I haven't seen anyone compare BAC to LEH. I personally was just answering a question, which was interesting. Bulls on this board write that a 9.5:1 leverage ratio is somehow evidence of a fortress balance sheet. What happens to shareholder value if the value of the assets simply decline by 10-11%? It's game over. So you are basically hoping the value of the assets are not currently mismarked by 10% and/or hoping there is no future decline in value. True value investor would never take these odds unless "loaded" I have no idea if this hope will come true but the margin of safety is not as great as some bulls would suggest.

Rranjan -- glad you acknowledge that you have zero insight into tangible book value...this would be a problem for most value investors. Based on the absurdity highlighted by FHLB and BAC's single scenario expectation for rising home prices/no recession on the Berk cc (which I listened to), I believe there is legitmate reason to question their assumptions re tangible BV. Although I see that you believe your "homework" has provided you with special insights into future operating results...gotcha. And I agree -- no reason to continue debating this topic further.

"Were there any good investors in Lehman before bankruptcy(not a couple years before hand or anything crazy, of course)?" Interesting to note that Hank Greenberg and Blackrock were part of an investor group that bought $6B of LEH common and pfd shares in the spring of 2008.

ahhhh...gotcha? i should have known better than to take you seriously as a value investor after this "strategy" update...but i always give the benefit of the doubt...and nevertheless, i am honestly hoping you do well with these "strategies" "Is anyone buying now, or waiting until Jackson Hole? I sold out of FRFHF and 1/3 of my hedges to build up some cash, buy more HHC and WFC, and to open a full position in BRK/B. I still have 7% in cash. Perhaps another opportunity will arise if friday is a disappointment."

rranjan -- you (like other bulls) never come to grips with the reality that you have zero insight into the assets and the assumptions that underlie tangible book value estimates. To say otherwise is pure self delusion. Given this reality and the leverage, investing in BAC based on some assumption of "downside protection" is ludicrous. There is no foundation to your "asymmetric risk/reward" assertion. And how could you have blind faith in management assertions re BV when the only sample we have of those assumptions (FHLB -- see earlier post) are completely unrealistic? And what happens to BAC's own calc of BV if home prices decline next year instead of going up? -- there is no margin of safety in BAC's own assumptions in this regard...if you listened to the Berk conf call management acknowledged that their assumptions do not cosider a further decline in home prices or even a recession...crazy.

"I'm really curious about the deliberate opaqueness of the retail/restaurant segments." Are you serious??? Do you really believe segment accounting will ultimately affect value? Right or wrong, he is simply "creating" a track record of impropriety/incompetence by existing management...laying the groundwork to boot existing management at some point in the future and take control of the company.

rranjan -- fair eough. I see your point. I was more dismissing the notion that any outside investor could independently develop an accurate measure of tangible BV for BAC and consequently any estimate of margin of safety based on this measure is highly flawed. And I also completely agree that BAC could go to $0 or could well go to $40+ but I also believe that it is impossible for anyone outside BAC (and possibly even for those on the inside) to determine the likelihood of BAC reaching $40+ or going to $0 -- too opaque. Most true value investors would run from BAC because the margin of safety is impossible to determine given the lack of insight into the assets and the high leverage. I'll throw Barel Karsen some props -- seems to be well grounded in reality. Note he is not saying BAC is a short just pointing out the self delusion by those who believe they can value this company, specifically tangible BV -- exactly what I've been saying. http://www.barelkarsan.com/2011/08/bank-of-america-value-stock.html With Bank of America (BAC) trading at just a third of its book value, I frequently receive questions pertaining to its potential as a value investment. Some value investors purport to be able to value banks. Some may actually be able to, while others may only think they are able to. For the average retail investor, however, it is just too difficult to determine the intrinsic values of these "black boxes", for several reasons. First of all, determining the value of the assets of these institutions is a guess at best, without a deep understanding of the bank's loan portfolio. As we've discussed before, some businesses are easier to understand than others. With the complex behemoths banks have become, their business models are very difficult to understand. I can't honestly say that they fall within my circle of competence. But even if one could determine what the assets are worth to some range of values, the amount of leverage used by the banks seriously clouds the value of the equity. For example, for Bank A, you may believe the assets are worth $10,000 plus or minus 10%; but if Bank A uses $9000 in debt to fund those assets, the remaining equity value could be anywhere from $0 to $2000. As long as the shares trade in that range, you have no idea if you're buying at a discount to intrinsic value. If one is wrong about Bank of America's liabilities, for example, even a seemingly large discount to book value can be completely wiped out. Needless to say, the high debt levels used by banks also make them much more susceptible to collapse during downturns, which is a phenomenon we could see at any time without warning. Value investors much prefer companies with low debt, as these have much greater power to weather downturns. Even if a bank is offering a high dividend yield of late (not BAC), it's extremely important to understand where that dividend is coming from in order to attain reasonable assurance that it is sustainable. Buying blindly for dividend yield is not an option. The dividend cuts that have taken place throughout this downturn have proven how susceptible this strategy is to an erosion of principal. Are there circumstances under which I would buy banks? Certainly. Under a situation where the entire industry is undervalued for example, a purchase of a basket of several banks helps diversify away the risk of failures here and there. This is a similar situation to Francis Chou's approach on pharmaceuticals, where large amounts of research money are being spent, but it's unclear which companies will reap the rewards. The bottom line is, buying individual banks is a risk unless you understand the value of what it is you're buying. Buying because stocks are down, or because momentum is up, or because yields are high does not adequately protect your capital.

Txlaw -- you are an emotional one. How many times do I have to fully admit that I have no idea if the stock is a buy or a sell. Too opaque. "Massive buyback? This indicates you know nothing about BAC. To even suggest that BAC can buyback stock is ignorant." Well -- I thought the question was rhetorical but since it flew right over your head, I'll ask directly. Remind us again why BAC can't pay a dividend or buy back stock? And why were BAC management assumptions rejected? And why is BAC still not even considered a candidate to pay a dividend or buy back stock, despite management assertions the company is full capitalized with nothing but massive cash flows in the future? "Management responds to Blodgett with a press release that equates to nothing more than name calling? A poor response by BAC PR. If they had just left out the part about Blodgett being banned from the securities industry, would you still say that there was no substance whatsoever in their response?" Every aspect of the PR was a disaster -- there was nothing to it... "Munger, until you directly respond to legitimate questions and arguments, nobody is going to take you seriously at all. Nor is anyone going to provide you with a detailed analysis of why BAC is undervalued at these levels." Again, the comment flew right over your head -- the point is that I have no opinion and no emotional attachment to a buy or sell on BAC. If facts materialized showing the BAC represented a great buying opp, I'd be the first into the market, buying as much as I could. I'm not looking for anyone to spoon feed me on BAC...if any analysis were possible with publicly available info, I'd have done it myself already.

For the record, again -- I have no agenda. No opinion on the stock. I do firmly believe the bull case is not supported by any analysis. And there would be none happier than me if someone/anyone could provide sound, factual analysis supporting the bull case...but all anyone can do is parrot management's assertions re tangible book value and "normalized pre-tax pre-provision earnings." Rranjan -- I didn't answer your question because I thought it was the height of ignorance. With the question, you come across as someone who just finished reading Buffett and Graham writings for the first time, believing you are now one of the few "enlightened" and couldn't wait to pounce on the "less enlightened" -- very funny. So no -- I don't "think" that way. If I had a position in which I had full confidence and the stock price was cut in half in less than a month to an absurd valuation, I would buy as much as I possibly could at the new lower valuation. I would also be able to support my action with independet, factual analysis. In this case, however, I believe the original Berkowitz thesis (seemingly embraced by many on this board) has been shattered because the thesis was never supported any analysis -- just parroting management, with platitudes thrown in -- e.g., stock is already at a discount to tang bv, future cash flows massive...impossible for downside in stock price. Berk put 20% of his fund in the stock because he argued there was no material downside given the "obvious" valuation. If the company was fully capitalized at $15 and then $11 with nothing but years of massive cash flows in the future, why have we not seen a MASSIVE buy back of stock at these "low" levels? Why has there been ZERO insider buying at these levels? Why does the company now hint at efforts to raise capital??? -- how is this possible. What happens to this margin of safety in a recession? Management responds to Blodgett with a press release that equates to nothing more than name calling???

Remeber -- I have no opinion on whether the stock is a buy or a sell. But I do know for certain that the bulls on this board support their case with no analysis...zero...nada. "the stock is literally forming a bottom" I believe I heard that assertion at $11 and $9 and $7 and now $6ish. You all should be thrilled about the JPM rumor because it is giving the stock a nice boost. "Moynihan made it very clear he intends to buy shares when he is allowed to do so on the call with berkowitz." Very unsual we're still waiting to see him act. What could be the legal impediment this long after the call? -- efforts to raise capital??? -- but how would that be possible since they don't need to raise capital? "Moreover he made it very clear his ENTIRE net worth is in BAC." If true, how could he have $ to buy more? Something doesn't smell right. Also waiting for answer to question #2.

Also from Blodgett twitter post -- "BTW, with help of readers, I've checked $BAC's European exposure. It is "$17 billion," just as Yves Smith said. Not "off by factor of 10"" I have no idea but notable that he and others are on the record saying BAC management has outright lied in a formal press release. Will be interesting to see how this plays out because if Blodgett and others are correct, BAC management has now opened itself up to serious legal liability.

I've never met Blodgett but he seems fair and reasonable in this case. Here is the chance for the bulls on this board to prove their point -- step up and answer the call. No more platitudes -- do the work and support your passion. DEAR READERS: Please Help Me Figure Out What Bank Of America Is Actually Worth Read more: http://www.businessinsider.com/what-is-bank-of-america-worth-2011-8#ixzz1VxDPXAH1 As you might have noticed, there was a bit of a kerfluffle this afternoon when Bank of America took issue with a blog post I wrote about why its stock was collapsing. In the post, I explained that the market clearly didn't believe that Bank of America's assets were worth what Bank of America says they are worth (this seems self-evident). I also relayed some asset-exposure numbers from Zero Hedge and Yves Smith, two of which Bank of America says were wrong. (I added Bank of America's comments to the post. If Bank of America is right and Yves Smith is wrong, I apologize.) Truth be told, the last thing I wanted to spend one of the last weeks of summer doing was digging into Bank of America's balance sheet, especially with so many more important things going on. But Bank of America's stock keeps tanking--it's down again, in the aftermarket, despite having been upgraded today by JP Morgan. Basically, the stock is acting like the company is insolvent. And now that my blog post has been blown up into this huge "call" on Bank of America, I actually do want to get to the bottom of this. So I would be grateful for your help. Please send me any detailed analyses of Bank of America's balance sheet that you've found helpful (links or PDFs). I'll review them, summarize what I learn, and then see if and where there might be more useful work to be done. My email is hblodget@businessinsider.com. Thank in advance!

Couple of questions for the spirited bulls: 1) During this epic collapse in the stock price, how many insiders have reached into their back pocket and bought stock? How much did they buy? And specifically, how much of his own money has the CEO invested in the stock at these supposed ridiculously low valuation levels? 2) What happens to BAC if home prices decline by a modest 5-10% next year? How does the margin of safety hold up under that scenario? Similarly, what happens if US falls into a recession? And here is another opinion on the banks. Not a big fan of BR but he sure does have a dramatically different viewpoint than the bulls on this board. The US banking sector is not healthy. There is a fundamental misunderstanding about the Wall Street bailouts amongst the public, and quite a few policy makers at Treasury and the Federal Reserve: Somehow, they “fixed” the banking system. All it took was few trillion dollars in liquidity and a few $100 billion dollars in recapitalization, and all is now fine (I suspect some people at the Fed know the Truth). In fact, they did nothing of the sort. The banking system was not saved; The massive injection of liquidity temporarily salved the day-to-day operations of banks, but they did not repair what ailed our financial institutions. Indeed, pouring billions into nearly identical management teams that mismanaged the risk, over-leveraged exposure, and drove banks off the cliff in the first place was an invitation for another crisis. And that crisis now appears to be arriving. And, its our own fault. Consider what was actually done in 2008-09, and you will understand why none of the underlying problems have been repaired: • Bank holdings: Remain stuffed with declining assets, primarily in Housing and Derivative holdings. Another leg down in Housing could be nearly fatal. • Transparency: Balance sheets are unnecessarily Opaque; Eliminating Fair value accounting via FASB 157 did not fix balance sheet problems, but instead allowed banks to hide them. • Capitalization: Remains too thin; leverage should be mandated back to the pre-2005 rule change of no more than 12 to 1; As we have learned, management does not keep adequate capital unless mandated to do so (sufficient capital reserves cuts into profits); • Misaligned Incentives: Compensation and bonus schemes were not significantly changed after bailouts, except during loan repayments. Thus, management and traders still have the same upside to roll the dice, but do not have the downside risks, which remains on shareholders and taxpayers; Let’s use a counter-factual, a simple thought experiment of what would have been had we gone Swedish on banks like Citi and B of A, placing them into a prepackaged reorganization (that’s a polite phrase for “bankruptcy”). The easy stuff: Senior management all gets fired. More than just the CEO — nearly the entire top floor at the bank, including the Board of Directors, gets canned. Equity shareholders get wiped out. Whatever is left over after all is said and done goes to the bondholders, typically, at about 25-50 cents on the dollar. (Note that in Sweden, bondholders got 100 cents on the Kroner, but that currency was significantly devalued — so the bondholders were not made whole, they lost between 50-75%). Temporary nationalization is the play: Uncle Sam provides debtor-in-possession financing to keep operating. All of the bad holdings, mortgages, derivatives and other liabilities are pulled out, and auctioned off. This includes the REOs, the CDS/CDO book, defaulted mortgage obligations. Remember, there is no such thing as toxic assets, only toxic prices. At some valuation, these are worthwhile investments — just not 100 cents on the dollar. Let healthy buyers pay 15-30 cents.And anything that is worthless is written down to zero. We recapitalize the parent bank, and spin off each division: IPO Merrill Lynch for $20 billion, spin out a clean Countrywide at $8 billion, sell of all of the non depository bank pieces. What you have left over is a well capitalized bank, owned by Taxpayers, with well capitalized former divisions as stand-alone companies. All of the above have transparent balance sheets (No FASB 157 required to hide the garbage investments). Eventually, everything is spun out back to the public markets. Uncle Sam is repaid, and what is left over goes to the bondholders. This would have created a transparent, unleveraged, adequately capitalized banking system that would be contributing to, rather than detracting from, the US economy. But all that was a missed opportunity — for W and O alike. What we have today instead is an over concentrated set of banking behemoths, barely off life support. Many of these remain mortally wounded by the holdings — holdings that they would have to shed through a healthy reorg. The recent downturn in the banking sector? I suspect it amounts to nothing more than a credible bet that these banks are not in any condition to withstand the next recession. (No, it was not Henry Blodget’s Fault). A rise in unemployment and another next leg down in Housing could very well be fatal. If the banks come crawling back to Uncle Sam for another bailout, it will be proof that “rescuing” failing financial institutions that blow themselves up is the exact wrong strategy. Real Capitalists know failure is part of the process. I suspect we may have another chance at a banking reorg. Let’s hope we do it correctly this time . . .

Well I couldn't let the hilarious reference to Dick Bove go... Dick on Lehman -- gotta love the guy...just coincidence but ironic that he made these comments in August of that year as well and the stock spiked because there were plent of believers... And I'm not comparing LEH to BAC but I think you should listen to anything Dick Bove says w great caution...classic video. http://video.cnbc.com/gallery/?video=828587679

"No, it just shows how a value investor thinks. First, downside protection." You are now down 50% -- so much for the protection. And I have simply pointed out that your bullish position is based entirely on platitudes and speculation. Whole lot of trust in what management is telling you but ZERO analysis. "At least throw out some numbers" Start by addressing the absurd assumptions highlighted by FHLB and then tell me why you have so much confidence the assumptions are absurd in only this case. I have had enough fun for today. I will repeat -- I HAVE NO IDEA IF THE STOCK IS A BUY OR A SELL. What I do know for certain is that your bullish opinion is based on nothing more than platitudes and speculation, which inherently carries a lot of risk. Your position in BAC is a roll of the dice -- and I honestly hope the best for you in this regard...I have no dog in the fight.