Mephistopheles

While the ultimate resolution will take 2 years or longer, there will be evidence and catalysts along the way to support one way or another, which is a positive for owning the preferreds rather than not, despite the par ceiling. I think people often miss this fact. For instance, say we have a decision in 2017 overturns the 3rd amendment. Rather than an overnight jump from $5 to $50 for the preferreds, I think it's more likely that we see a gradual rise as more transcripts, documents, briefs, etc. are released. After all, the preferreds were selling for less than $1 a few years ago. But the progress in the Claims Court case, various documents and supporting evidence has led to the rise. The ceiling does take away from the upside, but I personally haven't arrived at a valuation for the common that makes me feel like they are a substantially better bet. I used to own a mix of the two before Lamberth threw out the District Court case, but have switched everything to the preferred given that the common have rebounded substantially whereas the preferreds have remained just about where they were after the drop. I also am not sure about what sort of capital raise (dilution) will be required if and when the companies are released; this poses another risk for the common. Can you talk about what upside you see for the preferreds and the specifics you used to calculate that? TIA They're selling for about 11-12 cents on the dollar. I'm not a lawyer but I've read many of the court filings and opinions on both sides of the issue. I think if the rule of law is upheld, it's fairly obvious that the sweep is illegal. Certainly confident enough at 8 to 1 odds. If it gets to 2 to 1 or even, I will probably sell depending on the facts at that time.

While the ultimate resolution will take 2 years or longer, there will be evidence and catalysts along the way to support one way or another, which is a positive for owning the preferreds rather than not, despite the par ceiling. I think people often miss this fact. For instance, say we have a decision in 2017 overturns the 3rd amendment. Rather than an overnight jump from $5 to $50 for the preferreds, I think it's more likely that we see a gradual rise as more transcripts, documents, briefs, etc. are released. After all, the preferreds were selling for less than $1 a few years ago. But the progress in the Claims Court case, various documents and supporting evidence has led to the rise. The ceiling does take away from the upside, but I personally haven't arrived at a valuation for the common that makes me feel like they are a substantially better bet. I used to own a mix of the two before Lamberth threw out the District Court case, but have switched everything to the preferred given that the common have rebounded substantially whereas the preferreds have remained just about where they were after the drop. I also am not sure about what sort of capital raise (dilution) will be required if and when the companies are released; this poses another risk for the common.

Shareholders might lose in the court and the 3rd amendment may stay intact, but I personally think there is little to no chance of Fannie and Freddie closing down as profitable businesses. 30-year mortgage will never disappear because it's a part of American culture, to own your own home. Now we have two companies with several trillion dollars in assets and thousands of employees that guarantee mortgages for tens of millions of Americans. Why try to disrupt that and create something new and unproven? I can't imagine anybody in government having political will to do that, especially as we move further along from the crisis and anti -financial services sentiment becomes less and less effective. They had a few bills introduced in the last couple of years, none of which have gained traction. It's not going to happen, just like we won't ever get rid of Medicare or Social Security (not saying we should or shouldn't).

So it's an ideological investment for you? I think it's a value investment for him

Though I don't consider Uber as unethical. Not sure if it's illegal or not. Subletting a room that belongs to your employer on the other hand, I feel is unethical.

This is because the Court of Claims case is regarding whether or not it was an illegal 5th Amendment taking, whereas the District Court litigation is about FHFA not acting as a Conservator, right?

It is an interesting idea, but my opinion is that it wouldn't work. I don't think people mind loosening their wallets when on vacation. The idea of splitting a room with a stranger to just save a few hundred when you're supposed to be out indulging on a vacation isn't too appealing. Furthermore, most people travel in groups most of the time. Of course, then there are cheap value investors who flock to Omaha without any friends. Though that's a small target market. I don't know anything about programming or the amount of time/money investment you'd need to put into this. So maybe if it's relatively little effort and money, it may still be worth it. Are there other Omaha like events that you know of: people traveling alone with short supply of hotel space? Maybe if you find a handful of those then it would work. Take it with a grain of salt, just my humble opinion. Best of luck!

I do have a model for it, which if I shared could be argued as violating an agreement I signed with my current employer. So I won't share it or its conclusions, but I will say that the valuation is entirely ridiculous. Even a small change in sales growth rate or margin can move the valuation by over 20%. So in my view, it's pretty much a waste of time to value, at least in a conventional manner. Personally, I use more of a mosaic approach, and find it far more valuable than my DCF. Amazon is the clear leader in e-retail, at least in the U.S., and that's a massive advantage. As Amazon grows, its scale should allow it greater and greater bargaining power vs. suppliers over time. My view is that this is a sort of self-reinforcing moat, in that it gives Amazon margin that it can either give back to customers, that it can reinvest in future growth, or that it can use to fund new ventures. We see this happen all the time; take a look at Amazon's employee count. In my eyes, it's pretty clear that they're investing ahead of the growth curve to make sure they can maintain a satisfactory service. So long as the ecommerce business continues to grow, I want the company to keep doing that even though it makes profitability and FCF suck. And with ecommerce still in the mid-single digits as a percentage of total retail sales, it can probably grow at a healthy rate for another few decades. It's true that Amazon's GAAP profits and even FCF aren't that impressive, but that's why I like it. One of the things that really reinforced my thoughts here was this blog post by a former employee, indicating that many of Amazon's businesses are already profitable, and the company is reinvesting the cash internally. http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-model-narrative I suspect Amazon will be the largest retailer in the world some day, and when that happens, giving the company any credit for decent margins (compared to other large retailers), and I think the stock looks pretty attractive even now. But you have to believe in the business model to get there. I do. This is a company that requires essentially no capital to scale its ecommerce business; its net negative working capital allows the company to grow to as large as its infrastructure can handle without putting up any more cash. That's an amazing business, and because the business becomes stronger the larger it becomes, these cycles feed on each other. So, that's basically it. There's no magic valuation bullet here; it requires that you believe in the advantages of the business model and that they'll take the business far. Given the track record to date, I think they will. If they do, the stock will look very cheap in hindsight. If they don't, it will prove expensive. Thanks for the explanation, it was very helpful

Got it, well let's hope there is some legitimacy to it :)

The assertions made are pretty strong. Are you saying that you are not sure whether they are baseless or not? What I don't understand is why would simply making an statement that, for example, "a senior executive met w/Treasury regarding the DTA on the eve of the 3rd amendment" warrant moving forward with discovery? Unless of course they have some memos or what not to back it up. I'm just confused with the way the law and procedure works with these cases. Can anyone just make any wild accusation without at least some basis?

Paragraph 82 is also interesting: Thanks Are these just some strong accusations? Or do they have to have hard evidence to make these specific charges about Geithner et al? Just trying to understand the significance of this. Also, this case seems to be brought on by individual retail investors, right? Doesn't seem like there is a professional money manager involved here.

I took a quick look at this a few weeks ago. World ad spending is about $600 billion, which includes all forms of advertising, growing at 5%. Internet spending is about $140 billion growing at a 20% clip. Of that Google is about $40-50 billion of ad revenue. The aggregate valuation of these media companies looks extreme. An anecdote: GM (largest advertiser in America I think) pulled out of marketing on Facebook a few years ago because it wasn't working for them.

Great thoughts about GAAP vs reality, Scott. How do you value AMZN, if you're willing to share? I too think it's an incredible business, but not sure about the price.

I'm surprised that Ackman's analyst said discovery will take until the end of the year to complete. I was under the impression that all of the parties agreed to a hard deadline of July, after already postponing it once. The analyst's reasoning was that the government is holding back documents which will take time to get released and therefore we'll see another extension. If they are holding back documents (which is a violation already), which then causes a delay in discovery completion, would that not be another violation? Seems like this would only help the plaintiffs case.

Also, there's the issue of not having secured purchases with digital currency. Once you make the purchase, there's no chance in getting your money back no matter what, unless the seller refunds you. Well I think you hit the nail on the head as there is essentially no incentive for the average consumer to change which is absolutely necessary to break the network effects of the major credit card companies. For all its elegance this issue is likely to be the downfall to mass acceptance There are other issues of course. Security - a digital wallet can be "stolen" while a Visa card theft will not be charged to the consumer. Now defenders of crypto currency talk about the many ways to defeat these issues but that adds cost and removes the major advantage. You end up just recreating what is already there with the major credit cards.

Well, BRK shareholders get discounts as well - at NFM, GEICO, etc. We also get an open bar and free food on Friday night and Sunday afternoon. And a cheap meal on Saturday evening.

Well, one is a law enforcement matter and the other breaks the rules of the game.

lol Speaking of conspiracy theories, I've mentioned before that I make sure to read John Carney's tweets just so that I can hold a balanced opinion. A few days ago he kept raving about how the current dividend is now only 6% of the Senior Preferred, implying that the third amendment is proving to be beneficial to shareholders. Of course, he conveniently failed to mention that under this logic the dividend in 2013 was 70%. It's really hard to believe that this guy is playing the role of an unbiased reporter. In fairness, there are crazy people on both sides of the issue. I used to read the timhoward717 site, which seems to be authored by a very informed person, but he holds no credibility to me because of his melodramatic conspiracy theories. Yet somehow the blog gets hundreds of comments with each post, many of them from manic-depressive investors. It's concerning that there is so much untamed emotion out there with this investment. I try to look past all of this and just focus on the facts and the odds. Certainly one of the most fascinating investments I've made. Whatever happens, it will for sure be a great learning experience.

Thanks for your continued brilliant analysis, merkhet.

Great to see you sharing your sincere thoughts. Enjoyed reading it. +1

Completely agree regarding taxes. And then on the other side of the equation, he equates payroll tax to income tax, which makes his secretary's "tax rate" double his. He should also be subtracting her Social Security and Medicare benefits. What's really hypocritical here is that he includes the employer's portion of the payroll tax as a tax for the employee. Which is so incredibly dishonest, especially given that he makes no mention of the double taxation of dividends. It's true that we have budget deficits, and it's true that we must increase taxes and cut spending to compensate for them. But I would expect someone of his stature and integrity to not dive into the mud by using misleading tactics like D.C. politicians to try to bring awareness to the issue. It would be greatly beneficial if he used his business/economic acumen to propose a detailed taxation/spending policy instead of only ever saying "increase capital gains and dividend taxes on the ultra rich". We all know that even if that were to happen, it would only be a drop in the bucket. But sadly he offers no other advice, and on top of that he manipulates the numbers to help his argument. Regarding the criticism of private equity/activism: while 3G is definitely longer termed than most, they are still "active" in the sense that they go in and implement massive layoffs and shut down factories. I have no problem with that, but Loeb is correct to point out that Buffett does tend to criticize this sort of approach often - with the way he says that activists should leave management alone to run their business. Well, 3G is not exactly a passive shareholder either. Of course, private equity and activists are competitors to Berkshire's model of holding businesses permanently and not interfering with management. This is just a marketing maneuver to attract business. I don't think there's anything immoral or unethical about what he does; he's just an extremely competitive businessman, and I admire that. I have a theory, that all of this he says and does in the public eye, whether it be his tax argument, or slamming private equity/activism, his constant praising by name of many business leaders and politicians, or even his lighthearted, self deprecating humor - it helps create this warm grandfatherly image of himself while doing wonders for his reputation, and he knows it too, and takes advantage of it. This helps him get away with steals such as the BAC deal, for instance. Just all speculation, I could be completely wrong here. I should also say that I don't agree with Loeb for the hedge fund fee, and investing in financial services companies matters. Loeb himself is manipulating what Warren says to advance his argument. Why can't people just be honest and straightforward? I guess that doesn't win headlines, votes, or applause!

Two houses for sale - the one you are talking about is really playing it up in the marketing - http://www.livenexttowarrenbuffet.com/ (not super classy..) Wow that is incredibly tacky. At least be discreet and ask for a high cash price instead of A shares, and make just one mention of Buffett instead of dedicating half the site to it!

I saw somewhere that there is a house across the street where the owner is asking for 10 A shares, so now I'm confused. Was that a parody/joke? Or are there two houses for sale there?

It took me 6 weeks to get mine, and when it did I found my cover to be pretty messed up. I was hoping for mint condition. :( Also, they specify in the visitor's guide that we can't pick them up at the annual meeting. But of course, a book commemorating 50th anniversary will be available for $20. ::)

Check out the "Events and Meetings" section of the forum, there are a couple threads about this.