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The 400% Man!


Parsad

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He's wasting his time with Leucadia. I don't have any faith in the existing management.

 

I haven't followed LUK closely. But:

- Arlington previously owned JEF in 2011. He was a fan of Rich Handler.

- Ben, Allan's partner used to work at LUK

- Jefferies is the prime broker

 

So they should be very familiar with both LUK and JEF.

 

Big name value investors are dumping it. Everyone hates it. Not something I'm interest in, but I think they will do well on LUK.

 

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An investment advisor in Utah is questioning Arlington's track record.

 

https://www.valuewalk.com/2017/09/arlington/?all=1

 

I think he's barking up the wrong tree as it's unlikely Arlington is a fraud of any kind.

 

That said, I've seen some (plausible?) commentary on Twitter recently about Arlington possibly using some interesting strategies to generate some of its returns (selling puts and covered calls, lending out shares to shorts, etc.).

 

I know some members follow Arlington closely. Any thoughts?

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I don't follow them closely but if we assume there is no fraud, then to get from the 13F analysis (which shows much more modest performance) to their claimed performance, they would have to be using leverage or derivative strategies like you mention. Not that there's anything wrong with that, I sell puts to initiate or add to positions and sometimes sell covered calls.

 

But a good general question: what isn't required to be reported on 13Fs.

 

Edit: 13F list here:

https://www.sec.gov/divisions/investment/13flists.htm

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Haters are gonna hate.

 

Other things aren't reported on the 13F (like international securities). I think the guy is angry he didn't invest when he had the chance originally.

 

 

Foreign, do you have the twitter links?

 

 

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It is likely that his returns are aided by lending to shorts. I know a significant part of Eric Khrom's original thesis on the old Vistaprint is that he was earning double digit returns just from lending out the shares.

 

Presumably, Arlington would see the same opportunity in vistaprint. He's owned other heavily shorted stocks (outer wall).

 

So a straight look at 13f holdings would underestimate performance.

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This is from memory and I don't want to spend the time to quantify what's implied.

 

Dot com bust, value nirvana period, Arlington did 15%ish a year, so did many, many, value managers, or thereabouts.

 

08', fairfax odyssey did well, traded brk short term, brk made an offer to buy an energy company, energy company stock price tanked below offer, Allen was confident WEB wouldn't back out and backed up the truck, deal went through.

 

13' 50 or 55% position in brk, brk did well, also used margin at around 1% cost on brk position, vistaprint and xpo had great years as well. Sold puts on brk position.

 

16' not sure how they did so well, portfolio returns much greater than picks, maybe was levered part of year with brk..... could have bought a lot in the 120's. Already had an position in brk before 2016 could have sold some long end of 16' to end up with cash position of 20% plus or AUM simply grew from the letter they sent out saying it was the last chance for existing partners.

 

IMO, that explains most of the performance, if you add to that some short lending that helps obviously. 92% in 09 for small aum value funds isn't that extraordinary, I've seen many cases of this.

 

 

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If the guy did indeed lever a BRK quality position, he made a great move. Many people are terrified of leverage, but if used properly it's a necessity to outperformance. Something like BRK is not going anywhere. So theoretically, if I put 100% of my portfolio in BRK and then with a 1-2% interest charge consistently operated at 1.5-2x leverage buying what I believed where value investments, I'll probably do pretty damn well over the long run.

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Haters are gonna hate.

 

Other things aren't reported on the 13F (like international securities). I think the guy is angry he didn't invest when he had the chance originally.

 

 

Foreign, do you have the twitter links?

 

I don't know how it works for institutional investors or hedge funds but I have gotten as high as a 40% rate lending shares on my Schwab account. Always made me wonder what Schawb was charging the borrowers. Majority of time it has been in the single digit percentages.  I know that in IB you can setup your account for lending and split the interest with them 50/50. I don't believe Schawb discloses what percentage of the total take they are giving you.

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Haters are gonna hate.

 

Other things aren't reported on the 13F (like international securities). I think the guy is angry he didn't invest when he had the chance originally.

 

 

Foreign, do you have the twitter links?

 

I don't know how it works for institutional investors or hedge funds but I have gotten as high as a 40% rate lending shares on my Schwab account. Always made me wonder what Schawb was charging the borrowers. Majority of time it has been in the single digit percentages.  I know that in IB you can setup your account for lending and split the interest with them 50/50. I don't believe Schawb discloses what percentage of the total take they are giving you.

 

Anyone know what precautions brokers take to protect against massive sell offs? If cmpr is down 50% in a day and the sales by IB account holders is greater than the total shares lent though ib, what happens?

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Haters are gonna hate.

 

Other things aren't reported on the 13F (like international securities). I think the guy is angry he didn't invest when he had the chance originally.

 

 

Foreign, do you have the twitter links?

 

I don't know how it works for institutional investors or hedge funds but I have gotten as high as a 40% rate lending shares on my Schwab account. Always made me wonder what Schawb was charging the borrowers. Majority of time it has been in the single digit percentages.  I know that in IB you can setup your account for lending and split the interest with them 50/50. I don't believe Schawb discloses what percentage of the total take they are giving you.

 

Anyone know what precautions brokers take to protect against massive sell offs? If cmpr is down 50% in a day and the sales by IB account holders is greater than the total shares lent though ib, what happens?

 

Wait for gov bailout?

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I know they post collateral in the account. I would assume that might have to be tapped.

 

One thing I don't quite understand though, is some of the super high borrow rates. Occasionally you'll see 60%+. Why would anyone want to short a stock if you're paying 60% to do so, unless it's super short term? Or maybe I don't understand the whole thing.

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I know they post collateral in the account. I would assume that might have to be tapped.

 

One thing I don't quite understand though, is some of the super high borrow rates. Occasionally you'll see 60%+. Why would anyone want to short a stock if you're paying 60% to do so, unless it's super short term? Or maybe I don't understand the whole thing.

 

That's basically it. Higher rates you have to be super short term. The worst I've ever seen is BVSN was 120% during the big Jon Lebed pump in March/April of 2012. But otherwise, it's tricky and it's also why it's dangerous to follow some of the big guys on their investments. I know Ackman, despite shorting HLF in the 40's, now has a break even around $25 because of the huge negative carry and option decay. It's why I don't think Berkowitz or Lampert have really done as bad as some people think on SHLD. SHLD at various points has been 75%+ to borrow, the highest I've seen it was 90% in late 2011- early 2012. Imagine being short SHLD at $30 in late 2011, paying 90% pa to borrow, and getting squeezed to $80?

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I know they post collateral in the account. I would assume that might have to be tapped.

 

One thing I don't quite understand though, is some of the super high borrow rates. Occasionally you'll see 60%+. Why would anyone want to short a stock if you're paying 60% to do so, unless it's super short term? Or maybe I don't understand the whole thing.

 

What happens in a 30% market sell off when shares sold are greater than short lending capacity?

 

I emailed IB about this, no reply yet. I don't pretend to understand this but it seems like a yuge risk. I suppose IB is automated and forces the shorts positions to be closed out? Or in the case a particular equity sold off or the market, many shorts would cover and therefore the probability of anything catastrophic is muted?

 

 

 

 

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If the guy did indeed lever a BRK quality position, he made a great move. Many people are terrified of leverage, but if used properly it's a necessity to outperformance. Something like BRK is not going anywhere. So theoretically, if I put 100% of my portfolio in BRK and then with a 1-2% interest charge consistently operated at 1.5-2x leverage buying what I believed where value investments, I'll probably do pretty damn well over the long run.

 

Hm, I would be careful about this. IIRC, Rick Guerin did something similar, and he ended up selling his Berkshire shares to Buffett @ $40 a piece to satisfy a margin call.

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If the guy did indeed lever a BRK quality position, he made a great move. Many people are terrified of leverage, but if used properly it's a necessity to outperformance. Something like BRK is not going anywhere. So theoretically, if I put 100% of my portfolio in BRK and then with a 1-2% interest charge consistently operated at 1.5-2x leverage buying what I believed where value investments, I'll probably do pretty damn well over the long run.

 

Hm, I would be careful about this. IIRC, Rick Guerin did something similar, and he ended up selling his Berkshire shares to Buffett @ $40 a piece to satisfy a margin call.

 

Works until BRK falls 50% as it has done 2 or 3 times.

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If the guy did indeed lever a BRK quality position, he made a great move. Many people are terrified of leverage, but if used properly it's a necessity to outperformance. Something like BRK is not going anywhere. So theoretically, if I put 100% of my portfolio in BRK and then with a 1-2% interest charge consistently operated at 1.5-2x leverage buying what I believed where value investments, I'll probably do pretty damn well over the long run.

 

Hm, I would be careful about this. IIRC, Rick Guerin did something similar, and he ended up selling his Berkshire shares to Buffett @ $40 a piece to satisfy a margin call.

 

Works until BRK falls 50% as it has done 2 or 3 times.

 

Leverage always works....until it doesn't.  Or as Buffett says regarding leverage---"if you are smart you don't need it and if you are dumb you have no business using it." 

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If the guy did indeed lever a BRK quality position, he made a great move. Many people are terrified of leverage, but if used properly it's a necessity to outperformance. Something like BRK is not going anywhere. So theoretically, if I put 100% of my portfolio in BRK and then with a 1-2% interest charge consistently operated at 1.5-2x leverage buying what I believed where value investments, I'll probably do pretty damn well over the long run.

 

Hm, I would be careful about this. IIRC, Rick Guerin did something similar, and he ended up selling his Berkshire shares to Buffett @ $40 a piece to satisfy a margin call.

 

Works until BRK falls 50% as it has done 2 or 3 times.

 

And when it crashes 50% shift some of your non-equity assets into it and watch it rebound and make multiples on your money!

 

Partially kidding. I guess my main point is that leverage in the right hands is extremely profitable. Ya, ya I know about the banks in 08 but they were levered 40x. Banks have historically been profit machines using leverage. Buffett himself is actually kind of a hypocrite regarding leverage(and derivatives for that matter). He's always used them. Heck his largest investments are WFC and AMEX which are levered. Yea there are different types and whatnot but provided you are buying real value assets(vs bull market fantasies like VRX where you have to tell a story to find some angle to claim "value") a successful investor/competent risk manager should be fine. Again this isn't some off the cuff endorsement of EXTREME leverage. But buying undervalued/ low beta names and being levered 2-1 or 3-1 is definitely not as risky as a lot of people think provided 100% of your personal assets are not in equities and should "the big one" happen you have the ability to add cash to those 50% declines in BRK, BAM, etc.

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If the guy did indeed lever a BRK quality position, he made a great move. Many people are terrified of leverage, but if used properly it's a necessity to outperformance. Something like BRK is not going anywhere. So theoretically, if I put 100% of my portfolio in BRK and then with a 1-2% interest charge consistently operated at 1.5-2x leverage buying what I believed where value investments, I'll probably do pretty damn well over the long run.

 

Hm, I would be careful about this. IIRC, Rick Guerin did something similar, and he ended up selling his Berkshire shares to Buffett @ $40 a piece to satisfy a margin call.

 

 

 

He's already reduced his BRK position as seen in the 13F's.  Yes, he used leverage at that time, but did not use it much before...BRK was under $100K at the time.  Today it's at $270K+...I doubt if the fund is levered at all right now.  Cheers!

 

Works until BRK falls 50% as it has done 2 or 3 times.

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