ERICOPOLY

Well, but, as I have said, I already hold some cash… The problem with cash is plain to see: it will do well only if a market panic really unfolds! In any other scenario it will do terribly… FFH, instead, will do fine, even if the market keeps marching upward (at least, that's my business judgement...). What I want is a portfolio of businesses (both private and publicly traded), that insulates me from what the market does (read what other people do) as much as possible. I don’t want the growth of my net worth “to depend on the kindness of others”. FFH has a very well defined place in this portfolio of businesses, and I don’t know of any other company that might replace it. Gio For every share of BAC I hold, I have a matching put at $12 strike. The stock is at $15.70 today. Let's say we have a panic next month where the stock drops back to $12. Those $12 strike puts which today cost $1, will rise to at least $2.40 (just based on experience I think it will go at least that high). That means I have maximum near-term downside of 14.6%. That's a lot less downside than I suffered holding FFH through the crisis. Plus, I believe it holds greater upside in the case of non-crisis. Anyhow, you asked what was better prepared for the next crisis and where you can't stand holding too much cash -- that's an answer, although it's not perhaps what you were looking for as BAC itself won't be scooping up any bargains in a crisis.

I already hold both cash and some short positions… And I don't want to stay too much out of the game. Therefore, can you point me at a business, any business, not necessarily an insurance company, that is better positioned than FFH to take advantage of an hypothetical market panic? I would then gladly shift some capital from FFH to … Gio Cash. It didn't drop from $285 at the beginning of 2008 all the way down to $219 in March 2009. That drop was "only" half as severe as the overall market. Given the gains on the hedges, one might have thought the stock would go up, right? Wrong.

They are very well or extremely well positioned for an insurance company. It's just that an insurance company is not the best vehicle in a market panic (due to the restrictions on the portfolio allocation).

Eric, Of course I have already said it many times, and you know very well my thought on the subject… But I repeat it once again: the reason to hold FFH today is not that the price of its stock will do fine in a market panic… Sincerely, I have no idea how it will behave… And I don’t see how anyone can predict such a thing… What I do know, instead, is that no other company I am aware of is so well positioned to take advantage of a market panic. This is the only reason I hold such a large investment in FFH today. Because it is a business led by opportunistic people, who are doing something I understand and like. Period. And because I think it is cheap. No idea what the stock price shall do. And don’t care. You might say: well, I don’t like what they are doing… That’s perfectly fine! It is a business judgment. It is different from mine, but I understand and respect other points of view. And also find them useful. I think that’s what Packer is saying: he thinks this bull market will go on for years, therefore he feels no need to be invested in a business positioned to take advantage of a market panic. Very well! I can accept eventually to be wrong. (And don’t forget my firm’s equity is up 22% this year, the FFH’s investment notwithstanding! ;)) What I cannot relate to is the following thought: in a market panic FFH will go down with everything else, therefore I will buy it later at more advantageous prices… This is something I really don’t understand, because business is not done that way. Gio The insurance operations hold them back -- I don't think they can go 100% into equities in a crisis... they have credit ratings and things like that which hold them back in a crisis -- I view those things as a hidden & very real cost of their float. A better preparation for a crisis, IMO, is to just hold cash now instead of holding FFH. Then fully deploy the cash when things are really cheap. That approach would have worked a lot better in the last crisis of 2008/2009. They have this really complicated approach of owning lots of insurance companies, the headaches that come along with that, and lots of hedges, but in the end they only double their equity in the crisis -- this is a result I'm sure those guys could individually outperform if they were not investing within an insurance company. So given those shackles it puts on their investing freedom, one would hope the insurance operations would be extremely good in order to make up for this -- lots of underwriting profit. Where is it?

Nygren had 16% in Washington Mutual. Kaput! Back up the truck when the market is .... Greedy? For the record, i was an apologizer -- but out of lack of confidence i hid out with FFH. And Nygren is a better investor than me, but still gets a little playful ribbing for being bold when braver men were hiding. Original Mungerville played it well by having 100% notional Russell 2000 puts, and then having a 100+% long ORH position. I think that is roughly right. Instead, I had no cash and mostly FFH. I quit my job in early January, 2008. So I had nothing better to do than watch the daily events unfold. FFH dropped from $285 range down to $218 or so around September 2008 -- somewhere near $230 and $220 I was selling common FFH purchasing $120 strike FFH calls. Then out of the blue on a Friday the short selling ban was announced, FFH pre-announced a gain of roughly $400 million on AIG CDS the following Monday, and my (bruised at this point) net worth doubled by end of day Tuesday. So that was completely random. Because of that short selling ban (and due to the leverage I added soon beforehand), I finished 2008 up 20%. I would rather have been positioned like Original Mungervillle, but wasn't as smart/prepared. I didn't have a very complicated strategy -- just blown by the wind. It is somewhat amazing it worked out okay.

It wasn't the financials of the banks that were important (without context). The important thing was who they collectively lent to and their ability to repay. That's my hindsight opinion.

In that video, Justin Fuller says that Berkshire Hathaway looks like a call option. What the hell is he talking about?

Nygren had 16% in Washington Mutual. Kaput! Back up the truck when the market is .... Greedy? For the record, i was an apologizer -- but out of lack of confidence i hid out with FFH. And Nygren is a better investor than me, but still gets a little playful ribbing for being bold when braver men were hiding.

Happy Holidays everyone. Sanjeev, I'm very grateful that you decided to run this board and keep it running.

Look at what I'm getting for Christmas! http://www.weather.com/weather/tenday/Santa+Barbara+CA+93108:4:US Not a day below 71 in the 10 day forecast. 76 on Christmas Day. I'm going to Santa Claus Beach tomorrow -- where else!

I went into the Santa Barbara Sears store yesterday in La Cumbre Plaza. There were some customers, and there was a line at the checkout. But the store is huge. There was a much bigger and longer line next door at Williams Sonoma, and the store is relatively puny by comparison.

They become out-of-the-money puts as the stock starts to appreciate. Optimally you roll them after the stock has appreciated a lot (so the incremental cost of another year of insurance is cheaper). I want this situation because I intend to lose the entire value of every put already paid for -- cost of doing business. The best I can hope for is that the future puts that I will roll to are as cheap as possible. The only thing I like about the prospects of a higher BAC dividend is that it gives me liquidity to roll puts.

Right, remember Warren Buffett's protege who wanted to get there quick and blew up? Can't remember his name.. Are you thinking of Rick Guerin? He could have used at-the-money puts to protect his margin borrowing. I think that's really the lesson to learn from him, not that margin itself is bad (or at least that's my takeaway). Using puts simply means you losses might grow up to the cost of the put and the cost of the margin interest (which today costs nothing at IB). So really, just the cost of the put. You can't "blow up" if you go 2x levered this way -- just a bit of damage, but not "blow up". Say the put costs you 10% -- what, a year of setback? Maybe less? Maybe a bit more? It's not a big deal. Eric- any chance you can explain this a bit more? Are you just saying that you can buy puts against the borrowed portion of capital to prevent a situation where you owe more than you hold in a market decline? I'm to the point now where I only ever use margin if the loan amount is hedged with at-the-money put (in a "portfolio margin" account). So the loan is completely non-recourse. The put is generally expensive only in the early years (if done right) -- if you are right and the asset is truly deeply undervalued, then after a few years the asset should have risen substantially and going forward the puts will be a lot cheaper (due to skewness). You still will lose money if the market drops after you use leverage, it's just that it will be contained. It's easier to plan for when the worse-case is baked in the cake and part of the plan from day one.

Berkshire dropped about 46% from the 2007 high to the 2009 low. The at-the-money puts today cost less than 5% annualized for the first couple of years. Should Berkshire continue to climb in price, the annualized cost of the puts will drop as you roll them (due to skewness). This skewness thing is interesting. The gains from the leverage don't come in the early years, they come in the later years. Initially, Berkshire will climb at only a token amount higher than your cost of borrow (inclusive of the put). But over time the cost of that put comes down -- it only costs 1% annualized to hedge at $80 strike for example. So after 4 or 5 years, perhaps your $115 strike put will cost a similar amount. Right, so because it costs so much less after the stock has risen a great bit, I like the idea of using this approach with deeply-discounted situations. That way, you have a spring that will elevate the price up a good deal such that in future years your gains will come (still fully hedging the loans). So I liked that approach quite a bit for BAC where you have this catalyst over the next couple of years that bring it up to normalized earnings. Before then, the at-the-money puts eat up 2/3 of the net income. After then, they will be very cheap relative to net income -- likely more than covered by the dividend.

You would be better off with MohnishEnvy. He's richer and he took less risk to get there.

Now, if he makes 70% annualized our 13 yr old will have this much at age 100 in his Roth IRA: $111,958,265,066,587,594,584.00 That's for every single dollar invested today. So what if he's already got $1,000 packed away? But he'll only have $8.18 billion if he makes 30% a year -- on $1 invested today, or $8.18 trillion total if he's already got $1,000 packed away.

Right, remember Warren Buffett's protege who wanted to get there quick and blew up? Can't remember his name.. Are you thinking of Rick Guerin? He could have used at-the-money puts to protect his margin borrowing. I think that's really the lesson to learn from him, not that margin itself is bad (or at least that's my takeaway). Using puts simply means you losses might grow up to the cost of the put and the cost of the margin interest (which today costs nothing at IB). So really, just the cost of the put. You can't "blow up" if you go 2x levered this way -- just a bit of damage, but not "blow up". Say the put costs you 10% -- what, a year of setback? Maybe less? Maybe a bit more? It's not a big deal.

Capital gains at the time of selling or spending it. You don't know that do you? http://online.wsj.com/news/articles/SB10001424052702304773104579268322915488180?mod=WSJ_hps_LEFTTopStories So far, the Internal Revenue Service hasn't ruled on or addressed such issues directly. An agency spokesman released the following statement: "The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences" of transactions involving them. The agency is also "aware of the potential tax compliance risks posed by virtual currencies," he added. ... Mr. Marian says that he and many other specialists are "stumped" as to how the IRS will rule on bitcoin. He says his own sense is that it's a commodity similar to gold, because there's a finite supply and it's a store of value. He adds that some bitcoin transactions may be akin to barter—which has its own tricky tax rules.

How are these things going to be taxed in the US? As an asset (like gold): capital gains rates apply As a currency (like Euros): income tax rates apply Bartering? http://money.howstuffworks.com/bartering4.htm

What do you suppose will happen next? Pigs flying backwards? Textile Work Winds It Way Back to the U.S. One Chinese Yarn Maker Finds Savings in South Carolina Hard to Resist http://online.wsj.com/news/articles/SB10001424052702304202204579256120230694210?mod=WSJ_hp_LEFTWhatsNewsCollection U.S. Economy Begins to Hit Growth Stride Stronger-Than-Expected Increase in GDP Fueled by Consumer Spending http://online.wsj.com/news/articles/SB10001424052702304367204579270003162012122?mod=WSJ_hp_LEFTWhatsNewsCollection

It is hard to believe we're on the same planet as two yeas ago: The age of austerity may be nearing an end. After three years of belt-tightening, governments from Washington to Madrid are easing up. That may be good news because one of the forces tempering recoveries in the U.S. and Europe is what economists call the fiscal drag. ... The improving fiscal health of U.S. state and local governments also bodes well for the economy. Their $1.74 trillion in inflation-adjusted spending is 50 percent higher than the federal sector, and they employ seven times more people, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank. Having declined for three consecutive years, state and local government spending jumped 1.5 percent in the third quarter of 2013, the most since the second quarter of 2009. “The positive incremental effect from stronger state and local activity is considerable,” says LaVorgna, who predicts the U.S. will expand 3.2 percent next year after 1.8 percent this year. http://www.businessweek.com/articles/2013-12-19/austeritys-fiscal-drag-nears-end-as-europe-u-dot-s-dot-go-for-growth?campaign_id=yhoo

The analysts do say 1.34 for 2014, but if you are going to trade on a short-term forecast of 1 year like that, it might make more sense to wait 6 months. The forecasts for Q2 and Q3 14 earnings are substantially higher than for Q1 14. But then again, everyone is expecting these numbers. I think if the market is expecting 1.80 in 2016, it should just put 12x on it and call it $21.60. Then back out the shortfall for the prior two years, and make it $21. The additional legal costs will be buffered by the $13b remaining for DTA. But it will do what it wants to do. Then we have the seasonal dividend speculation. I think 10 cent quarterly dividend is in order to bring their status up near that of JPM in terms of yield. It would still be on the lighter side, but not too much.

The US has some of those gnomes too. Superchargers are free to all Tesla customers everywhere, and many places provide access to HOV lanes and parkings for free for electric cars. The orange cones are the Superchargers currently under construction -- the red dots are already completed: http://www.teslawiki.net/supercharger/

Go back three years on this board and gold and silver are the only true money. Search for broxburnboy's posts. Today that's forgotten and now if dollar gets replaced it will be bitcoins. Bitcoin's price skyrocketed, gold and silver... down.

I had a mortgage that gave me the option of prepaying an amount of mortgage principle every month. I believe that is very common and almost everyone with a mortgage has this option. So whenever they instead decide to put it into equities, they are using leverage. The alternative was to pre-pay the mortgage. Instead, they purchase equities. Seems pretty straightforward. Their choice to purchase equities leaves them with more debt.