ERICOPOLY

So they eliminate a KMart, install a relatively smaller Sears store, and presumably lease 18,000 sqft of space to a grocery store. I guess somewhere else nearby they will close down a Sears store and sell the underlying real estate. Taken together, they 1) monetize the Sears real estate 2) push the Sears inventory into a smaller 80,000 sqft footprint (presumably an attractive, renovated store) 3) Make better use of the very cheap long term lease rates of their KMart property

Actually, it is quite the contrary. It is known to be much more damageable to the brain during your teenager years, when you are still growing up. It would be much less damageable if people started only when they are adults! Anyway, I think it could be comparable to alcohol, but what I have seen is that it more often leads to more damageable paths (tougher drugs) or higher frequency consumption (but I don't have any data about this, just empirical observation with my bad own sampling!). Right, supposedly people who smoke pot regularly as teenagers wind up with lower IQ scores as adults. However, people who begin their pot smoking regularly as adults do not show any decline in IQ scoring. There was an article about this in the past year -- either WSJ or NYTimes.

We should make it illegal so that it goes away. Just like alcohol went away when it was illegal. Just like we have no prostitution, because it too is illegal. And we have no cocaine, because it is illegal. Thank goodness meth is illegal, because boy we wouldn't want anyone using meth. Everything is gone when it's illegal. When I was in high school, I smoked pot several times a month. And I drank alcohol usually every weekend. Both were illegal, so my parents were relieved to know that I wasn't using either pot or alcohol.

Software -- stress testing I was thinking about this the other day. Every company you buy that relies on rolling short-term debt -- it will eventually fail to be able to do so under a stressed environment. Same goes for a software program that relies on a system resource allocation without a backup plan to fail gracefully. Then there are multiple paths (an execution tree) that run through the code. We had software that would point out bugs in samples of such paths (it would simulate the execution via static analysis) -- this is a bit like the way you think about your investments when you are trying to grasp an estimate of that one true IV. You effectively execute a static analysis of a sampling of possible execution paths. You often at that point walk away if it's "too hard". You need more stable, predictable, boring businesses with long histories to more effectively utilize these static analyses. The more paths you can analyze statically (as a percentage of all possible paths), the more confident you can be that you'll have solid execution (as you can't test all possible paths in highly complex systems). Thus, the method works best when you can reduce the complexity (Buffett style businesses). Somewhat similar types of work.

Just run for Congress: http://articles.baltimoresun.com/2013-04-24/news/bs-ed-congress-inside-trading-20130424_1_congressional-knowledge-the-stock-act-insider

This board believed that increasing the float of ORH would raise it's price. Now the reverse is believed: increased float will reduce the price of SHLD.

It is a skill that is useful if there is an actionable investment idea brought to my attention. Somebody needs to throw the ball in the air for me to catch it. Somebody needs to put in some good blocks for me to get open. I can't work in isolation like the punter. come on Eric, I though you werent serious when you were posting all this, you are undoubtedly a much better investor then average and you will improve with time and make even more money. (like in perf reviews they say everyone has areas of improvement) but you are definately a 1 in stack ranks. you also exemplify some of the quotes of buffet with your style of investing “I’m no genius, but I’m smart in spots, and I stay around those spots.” :) you know your area and you have been doing excellent staying around those. And you also exemplify the 20 punch card quote opportunity look where you have got with 3-4 punches once you have 20 in next 40-50 years you might be on forbes list. its otherwise difficult for me to get what buffet is saying unless there is an example I can understand I got by with a few picks after having posters here spoon feed the basics about the business and the upside to me. It has to be a really simple idea for me to understand it -- which is probably the real reason why I don't have a diverse portfolio. Anything more complicated than completely basic and I'm lost. Really I admire Kraven's approach with 100 items -- I certainly don't think I can even manage that intellectually. And Packer really understands the businesses well, and lots of them. I just hope the board keeps turning over good simple ideas every now and then.

lol this is awesome. Some great fundamental research. One of the few (if not only) investing sites where you find investors doing things like this. The credit goes to heth. I wouldn't have put 2 and 2 together had he not shared the video. I think the next experiment -- to weed out false positives -- is to spend a bit of time in female clothes or something. I suspect I will get some dirty looks standing around by myself for an hour in the junior miss section... You might get funny looks in any department in your female clothes.

Regarding the "next Berkshire" thesis: How many investors are there now at ESL? A company will be ruled as a "Personal Holding Company" if 5 or fewer shareholders own more than 50% of the shares, and if greater than 60% of the income is from passive investments (including rents). http://www.answers.com/topic/personal-holding-company Contrary to what you would otherwise believe, Eddie and his buddies can't take it private unless they enjoy paying dividend tax (distributing out the earnings) or unless they enjoy paying the additional tax on undistributed profits. So he's not doing a slow takeover of the company if he eliminates Sears retail and starts leasing out the real estate (where the rents would then be greater than 60% of the profits). So when he finally decides that the profits will come from leasing the real estate rather than from Sears retail profits, then he will have to make sure that 5 individuals don't collectively own more than 50% of the shares.

I agree that I'd rather pay employees than the government, but the employees are taxed on those grants, so the government extracts its pound of flesh either way. True, however the tax will be the same if you pay them with cash. We can't get away without paying them.

Myth, You are right. There is nothing special about SYW. It would impress somebody in 1994.

What is the general opinion on this forum about additional lawsuits against Citi or BOA? Is this still a good time to invest in these companies? BofA is probably undervalued by about $4.70 per share, minimum. So that's like $54 billion (after tax). Or about $77 billion pre-tax lawsuit charges above and beyond what they've already reserved for (assuming 30% tax rate). So... what do you think the lawsuits will run them? EDIT: 13% ROTE is 21.60 per share at P/E of 12x. Less 40 cents for 2014, less 20 cents for 2015, is $21.00. Then you add in $1.10 for the DTA. That gets you to $22.10 -- and $22.10 is $4.70 per share above the current price. That's "minimum", because they can do better than 13% ROTE.

You shop at Home Depot online, and you pick it up in the store (or have it shipped to you). You shop at Nordstrom online, have it shipped to you, and if it doesn't fit you return it to the store. I don't see Sears doing anything unique with Shop Your Way. It's just keeping up with the Jones'.

You guys are wrong. The dilution costs less than the taxes on the dividend (if it were 100% of capital distribution via dividend). Plus, the money at least goes to our employees. Instead of going to the government which has been working to take our money away (via lawsuits). I suppose it varies by tax rate. I'd rather pay the employees though (that's my vote).

14.2% is not far from 15%. So if they could simply earn 14.2% in a mutual fund I could purchase it in my RothIRA and get virtually the same as their 15% goal without using any leverage at all. I don't put too much weight on their historical bond returns because of the great bull run from high interest rates to today's low interest rates. This is why I went with 4%. Anyways, what is their actual leverage level? If it's 50% equities and the rest must be sequestered for the insurance operations, then the bond leverage is expressed as a multiple on that sequestrated percentage. But if only 25% must be sequestered, then the bond leverage is expressed as a multiple of that smaller amount (double the leverage yet again). I'm obviously not dead-set opposed to their insurance operations (why would I be), I just want to quantify what their actual returns are from insurance -- it's all muddied together and if I knew how much they sequester for insurance (versus equity investing), then I could easily determine whether it offers a better return versus just using that sequestered money for equity investing instead. I think Berkshire doesn't have to sequester any money for insurance because they have relatively smaller insurance operations relative to their total pie. I believe the cash they have on hand for catastrophe events is actually just uninvested insurance float.

I also look at float as a means of gaining leverage from bonds. But let's say for every dollar of shareholder equity that needs to get conservatively idled (my explanation for their smallish allocation to equities despite hedging the equities and having permanent capital), you leverage it 3x with bonds. So let's say they have 4% bond yield -- times 3x is 12%. After tax that's in the 8%-9% range. Then add in a couple of points for underwriting profits (after tax) if they start to generate some. Then you get a number on what they actually generate from the insurance side of things. I'm merely saying that if you compare this number to what they earn historically on equities, it might actually be lower.

I'm looking for the line that illustrates the opportunity cost of the conservative investment portfolio as a cost associated to the insurance operations. Just ask Sanjeev... he'll tell you. Many times he has posted about how the portfolio is managed with the mindset that it's a large financial company (insurance) and thus the shareholder's equity cannot be managed the way it otherwise could be with respect to equities investing. I believe he specifically said this with regards to the large amounts of equity hedging. I don't think Sanjeev has it wrong.

I don't go to those dinners.

Alright, so if falling commodities prices are going to hurt the US economy, then rising commodities prices are going to help it? Did the parabolic rise in commodities prices over the past 15 years feed into better employment for US workers over the last decade, and rising wages for US workers? Did it boost consumption, or hinder it? Did it create a level of prosperity that is now going to unwind here in the US? My basic intuition is that it drove costs higher, which led to lower consumption, consequently lower levels of production and lower wage pressures. I recognize the effect it had on Australia (huge mining boom in a country hugely dependent on mining)... but I guess I'm just looking at it from the lens of the US economy.

Aside from just leverage... The approach lets me put all of my unleveraged capital into the one idea. Worst case, in the first year I lose only the cost of the put. Some of you guys are holding 40% cash. The 60% you have invested in equities can be down by at least 50%, and then you've got a total decline of 30%, versus my 10% worst case. And the opportunity cost of holding 40% cash can be 20% hit to your performance if you could have otherwise earned 50% on it. Look at Pabrais approach of requiring a 5x return on that last 10% of cash. Well, suppose I merely require a 2x return on that last 10% of my cash, and I chase that opportunity while buying an at-the-money put that costs me 10%. Okay, so I won't be that far behind him (only 10% cost) if the market then presents 5x opportunities over the course of the next 12 months, and on all the years when it doesn't I will be gaining ground if I'm earning returns in excess of the cost of that put. Plus, I find it easier to not hold cash.

Commodities going down in price isn't going to squeeze the producers of finished goods, is it? Let's say I depend on the price of steel to produce pickup trucks. I should worry about deflation's effects on my business if we are merely talking about the cost of steel going into the truck being cheaper? I don't get it -- that sounds like helpful deflation. I either make more profit on the truck, or I lower the price and make more trucks (getting full utilization out of my truck making plant, profits then rise). It is not helpful for commodity producers especially ones with debt. If it reduces earned income it would reduce consumers spending power. What will that do all the factory workers in developing countries? No question on the commodity producers. I don't see the causal link with factory workers. Non-commodity-producing companies see falling costs, the can sell more units at lower prices for the same or higher profit. Increased production leads to increasing demand for factory labor and this is bad somehow for factory workers?

Yes, absolutely. Leverage only works for rising stocks, unless your cost of leverage is zero.

Well, I guess that’s a matter of what you do best and what your circle of competence is. They have extraordinary investing results. This is where their circle of competence is. They do NOT have extraordinary underwriting results. So will you tell me where their should stay if you advocate for circle of competence? Staying within circle of competency is exactly what I am arguing for if I suggest that a pure investing structure might get them the same (if not better) results with less risk.

Well, I would argue that the ability to issue shares at 2x or 3x has been just another advantage over a mutual / hedge fund? Has it not? Gio This is a positive advantage to a holding company structure. Fairfax can have such a structure without writing insurance. I have not argued that holding companies are bad structures -- I have merely asked about the insurance operations. Specifically, I am asking if they can achieve these same returns without the risk and hassle of insurance.

If you don’t consider the outlier year of 1985, FFH’s BVPS at the end of 1986 was $4.25. Therefore, BVPS has compounded at 17.5% annual for 27 years. Sincerely, I don’t know many mutual / hedge funds, but among those that I know not one managed to sustain 17.5% annual for 27 years. Leucadia imo has yet another business model: I think it has been much more of an activist value investor than many people realize. Just read the last letter by former management and it simply jumps out of the pages! Activist value investing, like Mr. Ichan has proven many times, exploits a weak link in modern capitalism, and therefore enjoys a clear mean to outperform. Just like insurance, also activist value investing is not without risks… That’s why, just like insurance, it works only in the hands of skilled and shrewd entrepreneurs. Gio Fairfax has been very activist. Their model was to take broken insurance companies and try to fix them -- this was not passive investing. They take board seats at OSTK and BBRY (and others).