TwoCitiesCapital

Because I am getting nervous… During the last few weeks we have witnessed a short market correction… Which nonetheless was painful enough to prompt the FED into saying it is ready to stop the slow unwinding of QE and therefore to resume its stimulus… And the market promptly recovered… I like it less and less… And I demand more and more protection, meaning insulation from the general market. Gio Saw that too. Planning on a substantial increase in my FFH position come the new year when I roll my Roth 401k into my regular Roth IRA. Things haven't felt right to me for awhile - but seeing the reaction of general markets to a small correction was certainly disturbing and suggests that we are in fact addicted to the sugar high. Further, deflation in Europe appears even more likely than previously thought and small caps are better positioned for a fall than they've been previously and their bonds are killing it. What's not to like at roughly 1x book? Hey Zach, Did you buy the pinky? What custodian are you using, if you don't mind me asking? I wonder if they exempting the shares from the withholding tax (as they properly should) in your Roth? Thanks. I own the sheets a Roth at Scottrade. Withholding taxes are taken out of my dividends on foreign shares. I don't know enough about taxes to know if this is appropriate or not. Scottrade told me awhile ago there was nothing they could do about it an I didn't have enough foreign holdings to care until recently. Will be looking into this again as I consider where to move my accounts now that Scottrade doesn't ready quite cut it for me anymore

Totally understand the long short dilemma - just frustrated to put up with so many foregone gains to not fully capitalize in a drop that looks more likely from here than in previous years. I've done long/short bets that lost me money on both legs - didn't add to either side, simply closed out the trade and haven't attempted it again. I'm too familiar with how difficult it is and how to manage the sizing of each side.

Certainly great results 1) anybody follow insurance well enough to know if we're seeing a slow hardening of rates or are the results just a lack of catastrophes? 2) interesting to see hedges down further to 79%. Wonder if they'll talk about a change in strategy here. I have mixed feelings about this. Glad to see equity exposure that begins to have meaningful impacts on earnings but....kind of frustrated that we're only 79% hedged now that they seem to be ripe for paying off. I'm just waiting for deflation hedges to begin paying

Have you factored in the losses in SD and XCO? Nope. But also not factoring in gains from other investments or bonds either so I think it is going to be a wash - especially if you dont consider those losses permanent (dunno enough about the co. zachmansell, I don't understand the point you are getting at with the small caps. Are you talking about small cap indexes in general or small cap investments of fairfax? Could you elaborate? s to determine) Fairfax is short the Russel 2000 and has been bleeding money in it for years. At this point, small caps are close to being the richest value they've ever seen in decades and we're still in a precarious economic position - if there is a sell off, they should sell off much harder than the general market and finally make money.

Because I am getting nervous… During the last few weeks we have witnessed a short market correction… Which nonetheless was painful enough to prompt the FED into saying it is ready to stop the slow unwinding of QE and therefore to resume its stimulus… And the market promptly recovered… I like it less and less… And I demand more and more protection, meaning insulation from the general market. Gio Saw that too. Planning on a substantial increase in my FFH position come the new year when I roll my Roth 401k into my regular Roth IRA. Things haven't felt right to me for awhile - but seeing the reaction of general markets to a small correction was certainly disturbing and suggests that we are in fact addicted to the sugar high. Further, deflation in Europe appears even more likely than previously thought and small caps are better positioned for a fall than they've been previously and their bonds are killing it. What's not to like at roughly 1x book?

Thanks for all of the responses. I have a gut feeling that holding the stocks for 2 years has a good chance to outperform a one year time frame simply due to momentum for the successful stocks and reduced trading costs/turnover. If I'd like to look into this myself, is there a good database that would hVe the relevant information on prior stock prices, P/E, P/B, split, spinoff, dividends, etc to be able to back test? Anyone have a recommendation?

This seems to presume the stock will correct in that amount of time. What if it's still undervalued by 20% after 1.5 years? Do you hold it or sell for another 20% discount that may or may not appreciate. Further, this doesnt sound easily applied in an Auto investing type strategy. It's hard to know the discount for each individual in a basket and would require research and time and adjustments. You certainly could simplify to average portfolio metrics to determine undervaluation but I wouldn't want to make individual trading decisions based off of average metrics across the portfolio.

Thanks for the response. Of course the alternatives matter and I'd realistically like to research for each one; however, people were beginning to debate whether I should be do quant value funds, MF, etc as opposed to P/B which had nothing to do with the original question. I had noticed the same thing when I was doing my paper portfolios in MF but my 20 stocks for 3 years probably isnt conclusive or expansive enough to even really consider as evidence. Just trying to figure out if I should stick with the annual rebalance or cut fees and increase performance by holding for 2 or 3.

To clarify the ask, I'm looking for research on automated investing over different holding periods. It doesn't have to be based on P/B, it could be magic formula, or EV/EBIT, or P/E, etc. I just want to know the research thats been done. That being said, from what I've seen, a simple P/B method outperforms significantly with no adjustment. Greenblatts formula, from what I've seen, isn't as good and even he makes adjustments when applying it. I'd rather not derail the discussion with alternative ways of doing this because that's not the question I was looking to have answered.

Hi guys, I'm about to start putting a good portion of my investments on auto by simply buying the lowest P/B stocks available to me. No research and no exclusions. This is to hedge the possibility that I'm awful at this :) I do have a question about this: most studies I've seen look at one year holding periods and rebalance. This works great but has anyone seen research that looks at different holding periods of 2, 3, or 5 years. I've seen research to suggest individual picks from value managers tend to outperform the most 3-4 years after purchasing. My assumption is that this is the result of truly improved performance, market momentum, and a general change in perspective on the company by investors causing a rerating. I don't see why these wouldn't also happen for the successful cigar butts that drive the return for the group. It'd be interesting to see if a 3 to 5 year holding period for all, or the successful ones, could outperform the single year holding period. Anyone seen research on this out have experience?

Let him. In fact, we should encourage him. I would love to pick up preferred and common for 50% less then where they currently trade in a few months when I have my year end bonus.

Many people on this board have been accumulating cash for awhile now. Even after my two most recent purchases, I'm left with 25% cash. The two stocks I bought were down 30-60% and looked like steals even if I am concerned about general markets going down. Still plenty of ability to average down if my fears are realized. I don't think you can gauge sentiment by the buying and selling activity here. Most members seem to ignore the macro simply buy deals they like regardless. Maybe the sizing of the buys and sells changes - i know mine do- but few people here try to call tops and bottoms

Added 10% to Altius at 9.98 USD. Reopened a long in drybulk with SB at $4.95

They're certainly going to kill it with their bonds. I love the deflation protection but that on top of billions in low yielding bonds and hedged equities does seem like a bit much. Still looking to buy more in the New Year if it's reasonably priced

Here's to hoping it continues. Would love to roll my common shares into preferred and hoping this difference in momentum continues to maximize my preferred exposure. Theres been 50% difference in the performance between the twp since the drop.

I think we're getting bogged down at differing levels of granularity. Let's say you have a business opportunity that requires capital. For every dollar of capital it will return 15% on that cspital prior to the cost of that capital. This 15% is generally considered a great return (depending on inflation, cost of capital, and alternatives). This is a great business opportunity and is identified by EBIT/Capital which comes out to be an ROIC of 15%. Now, just because it's a great business opportunity doesn't mean the company is great. The company could choose to fund themselves with $1 of equity and $99 of debt. Return on equity would be close to 15x but any air pocket resulting in 1% hit to assets would result in total loss of investment. You could also have a company that does $100 equity and esrns 15% on that pretax. This is great but isnt leveraged and amounts to having 15x as much money up front to begin (or selling a piece of the future profits of a wonderful business opportunity). As we can see, the opportunity was the same but each company capitalized differently leading to significantly risk/rewards for shareholders. ROIC identifies good business opportunities. ROE is indicative of how a company is capitalizing to take advantage of that opportunity. ROIC is hard to fudge and change without changing the business opportunity. ROE is as simple to adjust as adjusting capital structure. Basically use ROIC to determine good opportunities. Use ROE to determine how best, and how much risk, is being takem to exploit those opportunities.

How are you guys thinking about the restructuring IF we win the cases. It's a hard road for the common shareholders even if we win as the only way current common is worth anything is if the company is mostly recapped through retained earnings. Fairholme's plan and Blackstone's presentation both seem to support wiping out common or massive dilutio on top of the 80% taken by gov. Is there a scenario where gov't warrants are worth something (exercised to purchase new common securities) and the common left worthless?

I doubled my position yesterday in common and preferreds. Everything I own is taking a beating though and I need to keep these at a reasonable allocation in the event I'm wrong (maximum of a 5-7% allocation I think). I will probably add again in the future, but it wont be until the next calendar year.

Thanks so much for your input and your patience. I've got no experience in law but am trying to make sure I'm not being stupid here. I dont think it takes a lawyer to see there's a smoking gun, just takes a lawyer to know if it can be proved.

Merkhet, It seems to me that the burden on the remaining lawsuits is to show: 1) FHFA was derelict in its duties as conservator (as evidenced by the implications and outcome of the sweep) to open it up to judicial review and 2) That a taking (or securities purchase) has occurred by the Treasury Lamberth says that there was no dereliction of duty because the FHFA was within its rights to execute the amendment. Lamberth sees the amendment as the solution that ended the ludicrous situation of borrowing from Treasury to repay the Treasury (and ultimately increasing the amount owed to the Treasury) AND resulted in increased profitability at the GSEs. Furthermore, Lamberth does make a strong case that defendants have failed to show that the FHFA lacked independence in its actions and that motives don’t matter. Can you tell me your thoughts on why Lamberth is wrong here? Is it simply that Lamberth is misunderstanding the purpose of Conservatorship and how to measure the success of such? Lamberth also suggests that no taking has occurred yet because the sweep is justified and that no purchase was made because no securities were granted – the sweep was simply an amendment to a right that the Treasury and FHFA were within their duties to amend. Can you tell me why you disagree here? I’m having trouble understanding why the judge would adopt the most literal definition of “purchase.” I’m also having trouble understanding why you guys think that “ripeness” will occur. If the sweep is appropriate, and if the liquidation is successfully done via the sweep, then it’s hard for me to see when we’d ever hit the point of “ripeness” where a taking has occurred. Can you help understand why you think that a liquidation would result in “ripeness?” Also, you seem really knowledgeable about this. Do you have a background in law?

I've just read through the docs. I've written my understanding of what was decided below, the reasoning why, and my commentary at the end. Comments, corrections, and arguments are welcome. I'm trying to wrap my head around this whole thing and am looking for all the help I can get. - TBH, I read through this section 3 times and still couldn't make much sense. I don't know why this was so hard for me to grasp but I just couldn't really understand what was being said. I'm not entirely certain this section is too important for other cases though. Essentially what I grasped from this is that the Treasury can't come under judicial review for actions taken as counterparty to the FHFA for the same reason the FHFA can't come under judicial review. Any judician review of counterparty actions, in these instances, would infringe on the FHFAs activities as Conersvator which is expressly prohibited by HERA. This actually makes sense to me, but it's appears to be hinged on the reasoning in Section 1 that I couldn't quite grasp. My understanding of the Judge's arguments: The government was able to "exercise any rights received in connection with" the GSEs without deadline. The government had a right to the dividend of 10% for it's contribution to its liquidation preference. This dividend was later replaced by the net worth sweep - therefor, replacing the dividend with the net worth sweep is just continuing to exercise a right and not a purchase of a new security. Furthermore, the government received no additional shares or securities so it's clear that no purchase was made. My understanding of Judge's arguments: Plaintiffs failed to demonstrate how 3rd Amendment violated HERA. This was broken down further into two arguments: 4a. FHFA motives for entering the 3rd Amendment are irrelevant - FHFAs protection from judicial review means courts can only consider what the 3rd Amendment accomplishes and not the motives for entering it. So I can agree that the FHFAs motives and reasoning don't matter, and that the FHFA will not be punished for making a poor decision, but I don't understand how the judge fails to see that the net worth sweep does result in a de facto liquidation of a large portion of the company every quarter and does prevent the rehabilitation of the co back to solvency. 4b. FHFA Has Not Viloated 12 U.S.C. § 4617(a)(7) My understanding of the Judge's arguments: Just because the Treasury developed the idea of the net worth sweep does not mean that the FHFA was "bound" to follow it or that it was under inappropriate influence to execute it. Therefor, the provision that provides that the Conservator "not be subject to the direction or supervision of any other agency of the United Sates...in the exercise of the rights, powers, and privileges of the Agency." Further, clearly the Conservator did it's job as the companies are now immensely profitable. This actually makes a lot of sense to me. I agree with the judge that even though the Treasury clearly came up with the plan doesn't mean FHFA was under their influence in executing it. This was not something I had considered previously. The point on profitability seem to miss the point. Conservatorship is meant to rehabilitate a company back to independence and solvency, no? The net worth sweep makes this an impossibility which means that the FHFA acted in direct disregard of its duty as Conservator. My understanding of this is that the Judge is saying derivative suits exist to get around conflicts of interest. HERA bars derivative suits and it's not enough to call upon a conflict of interest to get around this bar as that is already implicit in a derivative suit which was barred. Furthermore, even if the suit was allowed, there does not appear to be a conflict of interest at the FHFA with the Treasury. This actually makes sense to me as well. Essentially, since the companies haven't been placed into receivership, the preferred/common equity interests remain intact and no damage can be claimed. The Judge agrees that the FHFA had the authority to make the sweep as Conservator, and the worthlessness of the stock is a result of that sweep, so proposes this "injury" is ok as it was done by the Conservator in its regular course of duty. No other "injury" can yet be claimed and there is no preclusion of a 4th or 5th amendment that would undo even this prior "injury." A lot what Lambeth says makes sense to me, but I think much of it misses the mark. It seems that Lamberth dismisses the claims that the FHFA was operating outside of it's role as Conservator by simply showing that the FHFA wasn't under undue influence of the Treasury AND that it succeeded in its Conservatorship role as evidenced by the immense profitability of the GSEs. I can agree with the validity of both of these, but they seem to be such narrow views of the questions. It's clear that the net worth sweep makes solvency and rehabilitation an impossibility which is in direct conflict with their role as Conservator (right?). This would open the FHFA (and the Treasury by extension) to judicial review for being outside of it's role. Does anyone here disagree with this or think that this was adequately refuted? He also makes the case that no purchase occurred and that it was simply an exercise of rights - however, I disagree. It seems clear that there was an exchange that occurred between the two parties. The FHFA was received relief from the 10-12% dividend requirement in exchange for a 100% net worth sweep (in excess of an arbitrary amount that trends to 0). Even with no monetary remuneration or increase in the government securities, it seems clear to me that the result is that the government ended up with claims on a significantly greater portion of the economic value than it had before and that this was achieved through an exchange. How is this not considered a purchase of more securities when one of those securities was fundamentally changed to a greater value through an exchange of items by both parties? Does anyone believe this is incorrect or was adequately refuted. Lastly, the argument about no injury occurring because there is the possibility of a 4th or 5th amendment that could undo the prior injury doesn't make any sense. If I steal something, my ability to return it does not mean that no injury has occurred until a point in time where it is definitively clear that I will not be returning it. Did this strike anyone as reasonable? If so, why?

Probably because they're less liquid. I bought more of.both today - still a small position while I tru to grasp an understanding of all this.

1) can someone break down in layman's terms Lamberth's reasoning? I've read through both Epstein and Howard's analysis and am still fuzzy on this. Might just need to read it a few times. 2) how does the Fairholme trial differ from the Perry injunction? It was my understanding that they made similar arguments but one was requesting an immediate stop to the third amendment while the other was suing for government taking. 3) How should we be adjusting our potential for success now that one of the big cases has been thrown out

I though foxconn was only responsible for lower end devices and high profile ones would still be handled by BBRY?

Hi guys, I've been reading up a lot of behavioral biases and forecasting errors recently and I came across a bit of information that appears contradictory. In Thinking Fast and Slow it's stated that investors that watch their positions every day are more likely to be risk averse at the regular bad news that comes out and more likely to trade on it. In general, this decreases financial performance and the suggestion is to commit to holding onto a position for a minimum timeframe I've also read elsewhere that investors don't like to lock losses in and are more likely to sell winners too soon and hold onto losers too long. I understand that more than one bias can affect you at a time and these aren't exactly opposites, but seem irreconcilable enough that they both couldn't be generally true. What am I missing?