Valuebo

Meiroy made a good comment here (sorry, didn't answer yet, trying to catch up with the hundreds of SHLD posts in these last few days... Tom, could you elaborate on your strategy for these options? If there's a sudden and massive short squeeze and the options become deep in the money for a short while, will there actually be a reasonable market for them to profit from? Thanks. So yes; in the event of a short squeeze, who will pick up my ITM calls at those prices and why? I guess the spread would be huge and you'll likely have to sell them way too cheap. That said, I'm not counting on a short squeeze so if it happens it's all just extra's and it would mean a multi-bagger on a very speculative play on my part. Another interesting comment I just read but can't seem to find back anymore: Isn't it possible that Lampert is doing this just/partly to secure the 280.000 jobs, likely 0.2% (?? wild guess?) of total national employment? That would be quite the charity work! After all, he won't notice being a few billions richer... One could also argue that growing a succesful company adds a lot more value to society both in the present as over time. Idk... I just liked that comment. I'll try to post my thoughts not related to probabilities in the general SHLD topic later.

Related: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/ads/msg5557/#msg5557 It's a bit annoying but there are worse things. It keeps me from my galaxy at work.. :D

Great post SD. I was thinking about something in the same lines after this topic got posted but you clearly have some great insights already. This could really be a long term winner for the board, its members and the chosen charities. I hope some are willing to run with this idea.

http://www.cornermarketcapital.com/ Only two clicks away. ;)

Losses recouped but equally lost in the long portfolio? As Eric said, how is that exiting? Why is holding FFH now as a full position better than holding out with some nice cash for that eventual crash that will keep FFH exactly at where it is now, only at a lower price to book because it will get dragged down along with the rest? In the meantime while you are holding you are taking on the risk that a major catastrophe hits FFH and others. I don't find you silly Gio, not in the least. I like the discussions you bring and your way of standig up for what you believe in, keep it up! I just found that particular comment a bit weird because for me it was "upside down" to consider it good that they didn't lose anything on the hedges, especially with the market up 6% from Q2's end. I didn't mean to be offensive, sorry. Edit: Sorry, I didn't refresh the page so didn't see the new comments on the whole "exiting" thing. Ignore that part. ;)

You can change that in your settings! ;)

Looks nice, thanks Sanjeev, much appreciated. Saw that the offshore fund opened as well, gratz! $100k is a bit steep for me at this moment but maybe in a few years. ;) For those interested: http://www.cornermarketcapital.com/MPIC_Funds.html

S&P500 is up some 6% since the end of June so I don't see anything to cheer at regarding the hedges. BV at a certain time is just a snapshot. The hedges have been hurting performance terribly and mentioning the fact that they didn't lose anything on them as a positive is just ... silly? ;) Gio, some will trade the stock and others won't. Personal preferences, taxes, personality, etc will influence that decision. It turned out ok for me with an annual 10%+ return since 2011 in FFH while otherwise I'd be stuck with 10% at best.

Best show ever and I've seen plenty (The Wire etc)! Buffett approving it gives me a kick. :D I recently convinced my gf to start watching and she loves it as well. She watched 14 episodes in the last 10 days!

Oh and about what constitutes "investing". This is what one guy once had to say about it: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." I don't see what the specific period owning a certain security has to do with anything. Does owning a security longer make it safer, more valuable, less uncertain or anything else?

A fool can take a company down whether it's a big or small organization. That shouldn't lead you to conclude that a big organization cannot be more resilient than a smaller organization. Coca Cola is a very resilient business, and that is in part due to its size and scale (you can't attribute all of its success to the brand). In fact, Coca Cola is one of those businesses that would be hard to be taken down by a person at the top who is a fool. (As Peter Lynch recommended, and as WEB once endorsed, "Go for a business that any idiot can run -- because sooner or later, an idiot probably is going to run it.") Yes! Yet even Coca Cola isn't invinsible! etc Source: http://brainmass.com/business/business-law/220191 I believe one of the better Buffett bio's has some good information on it as well. I forgot which one. Not pointed at you of course txlaw but my point is that there is no ultimate safety. Not in BAC, not in KO, not in FFH and not even in BRK. There is no such thing as perfect correlation between risk, uncertainty, unknowns and the price you pay and therefore going for those bargains like BAC makes perfect sense. I would say you have a false sense of security about the insurance business because of the great investors who have decided to use such companies as their investment vehicles. Insurance can be a very dangerous business, much more so than banking, which is why WEB and Watsa are so vigilant about their underwriting (at least one hopes in the case of FFH). No banker should be complacent either, but the reason why a bank can be levered 10 to 1 is because that's the nature of the business. Ultimately, you only want to buy a bank or insurance company for the long run if it is well managed. On that I can agree with you. But I'm not sure why you would say the insurance biz is less risky than the banking biz. +1. This whole issue is a lot more complex than gio is making it out to be. Sorry but that post was terribly simplistic. Selection bias?? There is no easy one-dimensional answer.

Hi txlaw, Yes! Of course I agree! The view I don’t agree with is that anyone can be confident enough to say: I know BAC well, therefore I can judge its true value, therefore I know it is a bargain. Imo a $2 trillion organization is just too difficult! I always try to keep in mind Mr. Keynes words: Uhhh yet you have 30% of your portfolio in Fairfax. As if that is an easy to understand business! Not to attack you but let's face it; you're not an insurance expert. You are betting on the jockey here. Fairfax is a complex business in a very complex sector. Unless I'm terribly mistaken, you aren't a true expert of all it's moving parts. At best there are a few members here that have a really good grasp of all of Fairfax' details. Yes, the same goes for companies like BAC. But even much simpler companies have many unknown risks and uncertainties. There are a wide range of future possible outcomes for all companies. You just have to accept this fact as an investor and realize that at a certain price, you are likely to have a large enough MoS even including those unknowns and uncertainties. Plenty of members here have proven that going against Mr Market's fear of uncertainty can truly be worth it!

Good points by Premfan and SD as well. Thank you for the discussion. There is always the possibility of extreme events as well like solar flares. A storm equal to the one from 1859 would cause trillions in economic damage to the US alone! Nothing is certain in this world.

Fortunately, whoever buys today at BVPS doesn’t have to worry about that, right? Think of it this way: I believe the today investor is buying at the bottom of the cycle! :) giofranchi Unfortunately however, it is the real past. The bullish case was exactly what you are saying 3 years ago and Prem did make those remarks on 15% CAGR back then. While it has little impact on you as a new shareholder, it's still true history. You can't use the LT track record from year zero as a bullish point for owning the stock and ignore the lousy performance of the last 3 years both at the same time. While I'm confident in Fairfax' future under Prem Watsa and believe you are right to be a buyer of the stock, I haven't heard convincing reasoning on the business side of the matter other than the fact that they are well-protected and the macro doom scenario. If that is your main point for owning Fairfax, why don't you prefer cash or better combination of both? Surely Fairfax would initially tank with the market if it crashes. The price action the last few weeks show that this likely would occur for FFH shares.. Although most of that price action is purely rational considering how bonds have done. FFH's stock valuation has barely changed, although the stock dropped 10%. What I've learned from holding this stock on and off the past few years is that you can easily trade in and out and make the same or better return as you would by holding. If the market tanks or general economic disaster strikes, I'm sure I will be able to pick some up at a great price!

I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No. To get the IV prediction accurate with a higher batting average, and thus fewer investment mistakes, stick to businesses that are more predictable. (that's a "Duh" comment). I guess that by definition of the term "predictable business", you then realize that your IV number is a "prediction of the business"... well, more of the obvious. I would say IV changes in some cases and doesn't in other cases. For example, due to the fact that AMZN is trading at extremely inflated multiples for prolonged time, it is able to issue a small amount of equity to do a lot of things. The IV increase whenever it issues the equity at such extremely inflated multiples. You can run some simple math. Suppose AMZN's book value is $10 per share, and it issues equity at $200 per share and doubles the share count, what is the book value now? It is $105 per share! Who can create value faster than this? Buffet clearly cannot! ;) Then if the market thinks OMG, AMZN is much cheaper now than before, buy a ton! Then the stock price will jump to maybe $400. Those kind of companies' IV has little to do with BV and thus the effect on IV is much smaller. It's substantial but I don't see how they could exploit this forever. Do you have examples of extreme cases that were able to double share price a few times? I doubt they are out there and if they are it simply won't be for the capital injection but market perception of the company / simple momentum. OT: Bought some ITM SD leaps. Is CRM not a good example? They are making reckless acquisitions, so eventually they will go really bad. But assume they can issue shares at such extreme multiples and have our champ ERICOPOLY on the board to manage all the acquisitions, won't you agree that over the past few years, their IV would be growing? My point is, when these kinds of ridiculous companies trade at 100x IV, and they issue shares to acquire companies trading at 0.5x IV, doesn't this increase their own IV significantly? Oh yes of course. But that is assuming they actually do something valuable (even if overpaying) with the cash they get from issueing new shares. I assumed your hypothesis stopped after they issued shares. So they just hoard cash or use it for internal capex.

Well, I guess any comparison with the past might only take you that far, right? What is really needed in investing is a strong conviction about future possible returns. There is really no substitute for due diligence and all the hours spent studying and trying to deeply comprehend a business. :) giofranchi After doing your DD, what would you say are the possibilities for FFH? Other than Prem's track record of course. In the past, BV growth was helped by an amazing bull market in bonds, extraordinary CDS gains, the first years (? first year 180% BV growth if I remember correctly) of operations, ... I'm just curious because just a few posts ago you said this: The case for Berkshire is actually very simple (even after WEB is gone) with it's decentralized group of very high ROE companies, great insurance companies underwriting at a great CR and long-term equity investments. It's likely that it remains a stable powerhouse with satisfactory returns. Considering that you said yourself that there is no alternative to doing your DD; why do you view Fairfax as more attractive? For FFH I see a very safe 15% CAGR in BVPS for the next 10 to 15 years. To know and accept what I still don’t understand, and therefore cannot judge, and therefore cannot put a valuation to, is imo an integral part of DD. I repeat what I said a few posts ago: I just don’t understand a business on autopilot. But I am sure everybody else will do just fine with BRK! :) giofranchi But how do you come at that very safe 15% CAGR? I know Prem has stated it some 3 years ago but why do you believe it will occur business wise? To make up for the last 3 years of almost status quo after dividends, the BV has to double. I of course know that returns will be lumpy but I'm just showing what the hedges (mostly) are currently doing. BRK is much safer. I bet a 10% return from BRK might even have a better risk-reward profile than 15% from FFH. I agree. Part of the reason is that they are quite vulnerable without if the market would indeed crash.

Well, I guess any comparison with the past might only take you that far, right? What is really needed in investing is a strong conviction about future possible returns. There is really no substitute for due diligence and all the hours spent studying and trying to deeply comprehend a business. :) giofranchi After doing your DD, what would you say are the possibilities for FFH? Other than Prem's track record of course. In the past, BV growth was helped by an amazing bull market in bonds, extraordinary CDS gains, the first years (? first year 180% BV growth if I remember correctly) of operations, ... I'm just curious because just a few posts ago you said this: The case for Berkshire is actually very simple (even after WEB is gone) with it's decentralized group of very high ROE companies, great insurance companies underwriting at a great CR and long-term equity investments. It's likely that it remains a stable powerhouse with satisfactory returns. Considering that you said yourself that there is no alternative to doing your DD; why do you view Fairfax as more attractive?

I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No. To get the IV prediction accurate with a higher batting average, and thus fewer investment mistakes, stick to businesses that are more predictable. (that's a "Duh" comment). I guess that by definition of the term "predictable business", you then realize that your IV number is a "prediction of the business"... well, more of the obvious. I would say IV changes in some cases and doesn't in other cases. For example, due to the fact that AMZN is trading at extremely inflated multiples for prolonged time, it is able to issue a small amount of equity to do a lot of things. The IV increase whenever it issues the equity at such extremely inflated multiples. You can run some simple math. Suppose AMZN's book value is $10 per share, and it issues equity at $200 per share and doubles the share count, what is the book value now? It is $105 per share! Who can create value faster than this? Buffet clearly cannot! ;) Then if the market thinks OMG, AMZN is much cheaper now than before, buy a ton! Then the stock price will jump to maybe $400. Those kind of companies' IV has little to do with BV and thus the effect on IV is much smaller. It's substantial but I don't see how they could exploit this forever. Do you have examples of extreme cases that were able to double share price a few times? I doubt they are out there and if they are it simply won't be for the capital injection but market perception of the company / simple momentum. OT: Bought some ITM SD leaps.

Oke. Looking forward to it, keep us posted!

I find myself in almost the same position of twacowfca. And I am doing nothing (except watching Wimbledon and listening to the new Kanye West’s album). :) giofranchi Pretty much the same here as well. I've seen quite a few movies over the last two months...only the last week have I found something to start looking at again. Also busy with getting the Offshore fund off the ground...will launch August 1st! I would be watching Wimbledon as well, but my man Nadal went out in the 1st round. Now I won't watch until the round of 16. Steve Darcis sure did great against Nadal. :D We have our fair share of talent in Belgium, at least in tennis. Great that your offshore fund is launching soon. When can we expect more details?

Couldn't it be that some people here (not pointing fingers at all!) unconsciously try to act contrarian just for the sake of it? Sometimes it's just pretty hard not to have an opinion on something that occupies our mind a lot. Herding is another factor that could be in play here. The fact that this topic has 110 replies in two days should say something. And how much of your opinion is formed by the posts, thoughs and opinions of others? That's why one poster rightfully kept away from FFH's AGM for two years. Seek up those that have different opinions than yours, not those that solely agree with your views. Anyhow... I have nothing of real value to add, I'm simply clueless. :)

How is BRK a cash substitute? Does it promise somewhat equal buying power as cash if the market drops? No. It will drop both in price and underlying book value if the markets corrects. Especially if the "floor thesis" is false, it can't be a real cash substitute. That floor was nice when the stock was closer to it's BV, now it's just not as certain. I'll just assume that you don't mean it literally but just like it more than having cash rotting away in your portfolio? :) It's likely still even better than a cash substitute if you buy a hedge against your BRK position as well, but that's another thing.

recap = If the results weren't what they were, they would be better? Also, one quarter doesn't make a trend. Especially without any big losses. It has been quiet for now. Giofranchi, you are clearly an entrepreneur pur sang, ever the optimist! ;) I sold my FFH for a 15% gain in a few months. If we get any correction that gives FFH those big gains, it's likely that FFH will drop some as well. If I had more capital I would hold onto a certain number of shares forever; but I haven't.

Europe's inflation at only 1.2% now, really took a dive this last year! It's getting more and more likely that this trend continues.. Or at least that's what it looks like!

Gratz Parsad. By coincidence I just bought some SD Leaps today. Hope it turns out half as good as you trade! :D