ERICOPOLY

17.5%. And how much of that is due to issuing shares at 2x or 3x book value? Then, take that adjustment, and compare the final result to their historical return on equities. Then you get to whether or not it has been worth it, and to what degree. Irrelevant. It doesn't matter how many you know of outside of Fairfax, because there is only one HWIC. And it can be decoupled from Fairfax. It's like saying Buffett can't do well outside of the Berkshire structure because you can't think of mutual funds that sustain high returns. I would say "so what, they're not him!".

That they were really undervalued. :) Totally possible, but how many simply followed the few great investors that really recognized this? Hypothetical; lets say you had a group of people who simply copied Buffett a couple of decades ago. They would have outperformed, and you probably should give them some credit for choosing to follow Buffett. But it would be really one guy that would have been the great investor, not the group of followers (imo). So how many great investors versus followers are there on this board? There are great followers and poor followers. Who loaded up on IBM and ignored BAC? Who bought BBRY and ignored Bank of Ireland?

That they were really undervalued. :) It says we were lucky that a planetary extinction event did not happen during our holding periods. Any positive returns are merely a result of this luck. We are biased by the outcome believing it to be the only possible outcome. We are fooled by randomness. (some people try to elevate themselves by talking this way, so I figured I'd give it a try)

Share issuance I believe is something you want to factor into their growth of equity rate. You don't need to be an insurer to issue shares. How about you think beyond simply hedge funds and mutual funds. Leucadia is not a mutual fund/hedge fund. We can agree that they aren't deep in insurance either. They have done well for themselves anyhow. I am merely asking how much insurance operations help Fairfax. Seems like the first question one should ask of them: Why did you enter the insurance business? You already kick ass investing, how much faster did you compound your money after adding insurance risk? It does add risk doesn't it -- are you achieving meaningful risk-adjusted returns? You have years when equities are at their cheapest, and I think the insurance model is a drag then as it hinders their ability to load up. That's something that isn't discussed -- people only look at their float and only talk about underwriting loss as a cost of that float. I'm suggesting the float costs more than that because it hinders their flexibility at times when you least want to be encumbered.

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.

The stock was at $12 in March 2013 when I paid around $1.20 for $12 strike Jan 2014 puts. They expire two weeks from today. Today, they can be rolled to the 2015 $12 strike puts for just 36 cents. So the puts cost $1.20 for the first 10 months, and now they are just 36 cents for an additional 12 months. It has been a non-recourse loan where the adjustable rate went down dramatically. The price should be even cheaper this time next year if the stock continues to climb.

I'm partway through this book. Somebody (a member of the board) mailed it to me unsolicited. It is dragging up some old memories of statistics and probability from my college years (math major). I switched to math after a stint in psychology and business. I'm only a third of the way through the book so far. Mauboussin likes sports analogies. I think I am more a wide receiver than a punter. Mauboussin says it's easier to trade for a punter than a wide receiver because the success of the wide receiver depends more on the team attributes/dynamics, whereas the punter is more or less a lone wolf. So in the world of investing, all of my success came from ideas and discussions originated on this great message board that Sanjeev started. Therefore, I am not a punter. Take away my supporting team players, and I have no demonstrable skill.

I bought them so that I could limit the downside to a small amount, while keeping most of the upside. Then I leveraged it while containing the risk from the leverage. I am on margin -- so I do in fact need it. The tax laws encourage margin because they take away my money if I sell -- so I have to borrow instead. I agree. And I will roll to $15 strike when they are sufficiently cheap. Right now, it costs 7.9% to purchase $15 strike puts. That cost will continue to come down as the stock goes up. In March, when this thread began, it cost 13% to hedge at $13.30 via the warrants. So now it is vastly cheaper to go with the higher strike $15 put. Like I said back then, it didn't make sense to prepay 6 years of put cost when the stock price was sure to soon rise (it was, at least, what we expected).

Well, Amazon has no retail footprint (no brick-and-mortar storefront). Now, just think of SYW as somewhere in between old-school Sears and Amazon. There will be some retail footprint, just not as much. There will be the same amount of revenue, but some is generated online and some through the retail brick-and-mortar store. This frees up some of the real estate assets for monetization. Making the same revenues with less real estate (and hopefully less overall cost). The trouble is, so far it hasn't achieved the goal.

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).

Yes! Of course! Never pretended to be such a good investor, and I think that probably I will never be! ;) Gio Well, that makes two of us. I continually assert that I'm just an average retail investor who copies better investors.

Yes! Of course! But I think a goal helps you to keep things in perspective, and I find that to know what you are trying to build is very useful. By the way, I started my company with 25.000,00 Euros in capital at the end of 2004. Today its equity is worth 1.672.000,00 Euros… You calculate the compound rate! ;D ;D ;D Gio A bit under 60% annually compounded. This includes your own savings though I presume (earnings you chose to retain rather than paying out to yourself). I used to be able to compound by 100% in my 401k just by saving $12,000 so the balance went from $12,000 to $24,000. Is that partially the effect here? Still impressive though.

I find it astonishing that after the gains in 2012 and 2013, it is still conceivable (barely) to make 30% annualized returns from BAC for two more years over 2014 and 2015. The stock would have to be $25.35 (including dividends) by end of 2015. That would be 12x $1.80 per share (13% ROTE) plus $2 per share earned (using DTA) for 2014 and 2015. It comes out to $25.60 (12x1.80 + 4). It also assumes the $25 strike call is written (to bring the starting price down to $15). I'm not sure it's wise to write the $25 strike call (yet), but I wanted to do it for this example just to bring the math down to stock price that's within the range of capital generation + 12x earnings. That's really funny. Another couple of years at 30% annualized (possibly). It's not terribly unreasonable.

I got some immediate results when I went for the stripper shoes. I finished up 47.5% in my RothIRA. My wife's RothIRA finished up 67.5%.

Congrats! Mine cracked 7 figures the moment that the ORH buyout press release went out in 2009. My wife's cracked 7 figures last year... on her birthday no less!

My wife was watching the 'WE' channel a couple of nights ago. Sears was running a commercial for apparel (jeans) on practically every commercial break. Attractive ad :)

Gary, if you borrow money from the bank at 5% to purchase more shares, then your "cost of leverage" is 5%. There is an options premium -- think of this is prepaid interest for the loan term. There is a strike price -- think of this as the amount borrowed. Any missed dividends are also a cost of this form of leverage -- an additional cost of borrowing the amount indicated by the strike price. Is it clear now?

Suppose you took out a loan from your family paying 7.5% interest rate. You invest it into BAC for 12 months. You break even if your total return from BAC (including dividends) is 7.5%. 7.5% is your cost of leverage -- that's the hurdle rate. So embedded within the warrant is a synthetic loan. The point where the returns from the warrant match the returns of the common is the cost of leverage. It's where the costs from the leverage merely equate to the total return from the stock. Anything above that total return "cost of leverage" rate, the leveraged approach will outperform the unleveraged common. Anything less, and it will underperform. So the whole point of a warrant is to earn leveraged returns. Not leveraged losses! So it's intelligent to think about how much the leverage in the warrant costs before deciding on that particular tool to drive your leveraged strategy. Not to be nit-picky but this is not really your hurdle rate. It's simply your cost of debt in this scenario. You aren't compensating for the risk of the investment or your opportunity cost of foregoing other investments. If this is your view, your hurdle rate is always your lowest cost of financing available which wouldn't theoretically makes sense. Remember, it's completely possible to make a profit on an investment but return less than your hurdle rate. I believe that I misuse terms because I'm not an educated CFA or a professional in this line of business. To me the term make sense in the respect that if you don't clear the hurdle, you get hurt (thinking of a track and field hurdler). It's not my aspirational rate of return (which is perhaps what the pros consider the hurdle rate).

I feel like the switch was symbolic for his swapping out of BAC into SHLD. :P Okay, I've updated the Avatar again. I feel like this is more symbolic of the slide down the quality curve.

Last year he said housing would suffer in 2013 and exports would suffer. Ten years ago, in 2003, he forecast 10 years of deflation. Last year he said 10 year would go to 1% and 30 yr would go to 2%. This year, in September, he said GDP will be back to normal trend growth in just 5 years. How do you act on this advice while beating the market?

Bullshit! Cough... Bullshit! Cough... Last year Gary Shilling called for a recession in 2013. Now he's saying that the 2% growth was in line with his predictions in his book. Call it both ways and you've covered yourself.

This is permanent capital too: Existing company's shareholder equity without insurance float. HWIC manages this equity in addition to pimping out their services managing OPM.

See, I am naturally lazy. I prefer to take on non-recourse leverage (at a high "combined ratio") when selective opportunities arise. I can put all of that into equities. The prospective gains at such times far exceed the high leverage cost. And it's non-recourse. It costs more, but it's all in equities at times when they are heavily discounted (you get to choose when you have the leverage, and when you don't). Now, if I instead switched to insurance float (as if I could just hit a switch), I would be taking on liabilities hanging over my head for years. And this float would be low cost (maybe), but I could only invest it in low-yielding bonds (they pay how much right now?). I can't get 3x leverage (as with float), but I don't need 3x leverage. I can put a higher percentage (all of it) into very high "Beta" stocks, so even if I don't use leverage I still might cream the results of an insurance company. And then during a crash I can sprinkle a few calls in there for leverage (my high-cost float). The float costs more, but equities when heavily depressed offer a lot of return in reward. So I sit around thinking of this stuff a lot. I'm pretty sure they held Kraft and Johnson and Johnson not because it was the best value out there at the time, but rather because they probably have to manage the investment mix to some degree keeping in mind that they have all this insurance liability. So... these are things that spin in my head. Apparently just me?

I can't believe you guys never ask how much is gained by the more complicated structure. Are you just toying with me or are you really not curious?

It's a long running thought to determine how much reward they get from all the risk and effort of having an insurance company. You know, like if you can compound equities at 15% anyhow, without using leverage, then what do you gain by running an insurance company (leverage) for 15% aspirational result? It's an open question. I have seen historical evidence that suggests they can make 15% returns from equities. So why all the extra insurance stuff? Gio says that Mr. Brindle can make returns like that from insurance alone. But obviously FFH can't. HWIC can make 15% from equities alone, and perhaps Mr. Brindle can't. Gio says that we should just let these guys do what they are good at, but then he takes issue when I suggest that would be HWIC without insurance. Or are they better when insurance is added to the fold? By how much?