LC

Hi. I am new to this. Can a kind soul explain in more detail? An historical example with actual costs would be illustrative. Regards. Your best bet would be to read the BAC leverage thread under the Strategies forum...Eric describes exactly what he did, but I will do my best to illustrate it here with simplified numbers: You open up an account with IB. You qualify for "portfolio margin" (versus Reg-T margin). You borrow on margin to buy 100 shares of BAC stock at $17 per share. You pay 1.5% interest on the margin loan. You buy 1 put option on BAC with a strike price of $15 which expires in 2015. Now, you are fully hedged below $15. The most you can lose (aside from the option cost & margin interest) is $2/share. One year passes. BAC has increased to $19/share giving you a paper gain. You have paid margin interest. Your put option expires worthless, leaving you a taxable loss. You purchase a put option with a strike price of $17 which expires in 2016, and repeat the process. So essentially, you now have protected your paper gains and created taxable losses. But you don't have to pay capital gains tax, in fact you can keep rolling the gains forward year after year by rolling the put option strike price forward every year.

Eric's strategy is brilliant...buying with IB margin @ 1.5%, hedged with put options to prevent margin calls (in a "portfolio margin" account). The price of leverage is the margin rate + the put option (insurance) costs. As the stock rises you can sell the puts to book a taxable loss, then re-purchase puts at a higher strike price to "lock in" a tax-free gain between the two strike prices. I always have this technique in the back of my mind now, waiting for an opportunity to use it.

I'm still open to the possibility that he has high-functioning autism and is able to read through an AIG annual in 3 hours and retain it because he experiences the information differently. Or not ;D

Call the CFO and ask...that's what I usually do with micro-caps. Sometimes they are open, other times not so much. If I hit a wall with management I heavily discount that and usually walk away from the investment...it's much more pleasurable to invest alongside good, candid management.

Very true! The B&L deal was "out of the norm" based on Valeant's historical dealmaking. That does say something about Mr. Pearson's flexibility! I didn't mean to imply that they are "locked in" to making deals. You are right: Mr. Pearson theoretically has levers to pull at his disposal. I was simply commenting on the mechanics of the business structure and the potential problems which could emerge. Now for myself, I simply don't know Mr. Pearson well enough to know whether he will actually pull all those levers at the "right times". Gio obviously does! Or at least has more confidence one way than the other. Gio is right, I would do well to research the man's past actions to see if he has a history of making good use of the flexibility you mention.

Here's my thought of the mechanics of this business: A biotech company raises money, develops a drug, goes through the trials, is ready for commercial introduction. Let's say the costs up to this point are $100. Valeant comes in, pays some multiple of $100, and then produces & sells the drug commercially and reap the cash flows. Then Valeant uses those cash flows to make further acquisitions and keep the cash flows coming, as the initial stream will weaken over time. In terms of the accounting, take a look at the B&L deal. As a result, Valeant recognized 4.31b of intangible assets (which will be amortized) and 4.38b of goodwill (which will not be amortized). Should the amortization of those intangible assets be added back to earnings over time? That is a decision that you have to make about the durability of B&L's cash flows. So IMHO this is a dealmaking company. Yes they produce & sell the drug, but I don't believe they have some structural advantage in this respect. I've seen no evidence of a superior production/selling method (correct me if I'm wrong!). Where I do see the advantage is their ability to make good deals, in Mr. Pearson and his team. This is what I believe attracts their investors. I however don't know if he'll be still making good deals over the next 5 or 10 years because I haven't studied the man enough, these are my 2 cents.

Thank you Packer, it seems a bit strange that Mr. Pearson, who is so focused on a R&D “light” business approach, had invested so much to buy a company which instead requires high R&D expenses to keep generating cash… ??? Anyway, this is certainly an issue to watch closely! Gio Gio, Isn't the basics of the model that Valeant is buying up drugs which have already spent large amounts of R&D to develop the drug successfully? And avoiding the problem of spending R&D to develop a drug which does not become commercialized. Therefore it's more of a finance vehicle than a drug manufacturer. This is my understanding, please correct me if I'm mistaken.

What is more likely to change: under 40s attitude towards meetings changing, or another format comin out which will be a more effective weightloss tool?

I use SPY & IWM, as I would be passively invested in those if I were not managing my funds.

I like our 1% club more than this one: http://nymag.com/daily/intelligencer/2014/02/i-crashed-a-wall-street-secret-society.html

Exactly. This is why WD-40 is an excellent example. Why would I ever bother doing any research or trying something new when it is in-expensive enough and it works? When my can goes empty I just buy another one the next time I'm at a home improvement store. I've had WDFC on my watch list for a while but haven't bought it. They also own 3-in-One Oil, which doesn't have the moat that WD-40 has, but is another well known brand and something cheap enough that you wouldn't bother buying the competitor. Is WD-40 a patented formula that can't be reproduced and sold under a generic store brand? If that's the case, long term, I would imagine that they'd have to lose out longer term to cheaper generic store versions. I've seen significant willingness within my network of people to switch the generic brands, whether its cereal or canned food at the grocery store, or the Walgreens-branded versions of common drugs like sudafed/zyrtec/advil. In all these cases, it's inexpensive items that are just being bought for slightly cheaper, but I have definitely noticed them taking up more shelf space at stores (as well as seen them more often at friends/family's homes). Depends on the strength of the brand. Hershey and Marlboro are still going strong. And it's cheap enough to warrant spending an extra buck for the peace of mind that it will work, that you know how to operate it, etc.

Enjoy it Eric...surfing is awesome. My fiancee and I have given up on vacationing, we're in love with Costa Rica and go to explore and surf as much as possible. If you fall in love and want to vacation, check out playa guillones/nosara.

IMHO totally depends on the business. For example, trulia burnt all their ebitda on marketing and their stock dropped 20%. Other companies with an entrenched position this would not be the case (ie major CPGs)

1% as well. Sanjeev, you're a good man and I love supporting folks that exhibit the characteristics that you embody. Pleasure to know you.

IMHO, contrarian or not doesn't matter as long as your investment is yours alone and makes sense to you. I find myself reading less and less of blogs and forums and evaluating investments independently/in solitude. Maybe it's just the cold New York winters :)

I'm always afraid of the dutch auctions hitting the low end...have you gone through them in the past? in your experience, where does the tender price fall within the range? Any bad experiences?

don;t they have until the 15th? so monday?

IMHO, the MC was abnormally low. And the debt was probably covered by the fixed assets, and they would have no problem making interest payments given their ten year performance. Even if business slowed down and they operated at break even levels, there was relatively little downside. Margin of safety was very wide. See any ideas similar to this around today? :)

Just read through these, at the end, I would've thought an informed buyer would like to pay in the 300m350m range, yet mr market was selling it for 80m!

Curious that there is no Costco in this portfolio.

I think the odds are more in favor of increased coke product consumption worldwide vs a decrease. Increased consumption by emerging middle class markets worldwide will probably outweigh the decrease in consumption from US etc.

the way i see the dividend is a way to improve capital levels @ the bank while maintaining the illusion of a dividend.

My gut tells me...if we're arguing over 100K salary vs 200k salary vs possibility for 6 figures....well, then there are options. and one should be doing what you enjoy doing. i'd rather work at a fund for 100k/year than make 200k doing software dev...because i hate software dev and suck at it :)

possibly some marijuana stock? ;D

This was the case with FHCO last year. They received a large order and Poof, something like 8m of valuation allowances on their DTA were released and included in earnings.