ERICOPOLY

There are legitimate reasons outside of the "greenhouse gas" arguments. Such as... problem of peak load use on the electricity grid. Can you alleviate pressure on the electricity grid if you draw less electricity from it?

OK, so let's say he raids it, doesn't use it as a permanent vehicle, and shareholders are left with a sum-of-the-parts value for the shares they own. Shareholders buying today still win. THAT's the downside protection. It'll take time but Lampert would have to either (1) panic, or (2) have lost all common sense, for a sum-of-the-parts (even if it takes a few years) to not provide meaningful returns for existing shareholders. See, it's back to my line of thinking that if the SHLD downside is secure, what's the most likely way to earn 2x your money in two years. Is it to take the upside of SHLD or something else where the timeframe of upside is more visible? That's all I was saying. Then I was defending against the "miss the next Berkshire Hathaway" argument by showing how Eddie's spinoff strategy doesn't look at all like Berkshire Hathaway. You don't start to build the mighty Amazon by diverting it's flows for irrigation. What Eddie is doing bit by bit to SHLD looks more like it will create the mighty Colorado river (think about the mud trickle that actually reaches the ocean).

I suppose my heat argument applies best to an apartment building where the heat from your incandescent warms the people on the floors above you.

Those are all businesses that Buffett hand-picked for Berkshire. Lampert inherited much of what is under the SHLD umbrella. Even if he spins stuff off it doesn't mean he won't keep the majority of businesses and/or buy other companies to bring into the fold. And even if he doesn't, as long as he uses the money SHLD produces from monetization or improving operations to invest as he sees fit, well, I'll be a happy camper. I view SHLD as a real estate company with an integrated retail component, and the strong possibility of being a permanent investment vehicle for one of the only people in the world I would let make investment decisions on my behalf. He once had billions in cash at SHLD. Did he purchase a SINGLE new operating business with that cash? So far, it looks like strategy: a) hedge fund manager buys company and uses all excess cash to purchase more of each productive piece (theory is that the market was only valuing SHLD based on it's productive pieces, so that's all he was buying) b) hedge fund manager strips it of it's productive assets piece by piece (via spinoffs) c) leaves only crappy retailer behind in the end So it's just another company raided by a hedge fund to unlock value, leaving the carcass behind.

He doesn't even need to wind down ESL. Once his partners realize that ESL is 100% invested in SHLD, they would be fools not to walk away with their SHLD shares. Why pay a management fee for investment in ESL partnership when all it gets you is investment in SHLD (which everyone else gets for free) -- or rather, you can at least earn lending income on your SHLD shares instead of paying Eddie a fee if they rise in value.

He's investing a lot into SYW. It looks like he wants to transform and keep it.

Is the efficiency of heating form the bulb the same as that from a heater? No, because some of the energy is "wasted" as light.

Suppose Buffett started to spin off the various parts of Berkshire. 1) announces a spinoff of See's 2) spins of BNSF 3) spins off Furniture Mart 4) spins off NetJets 5) spins of GEICO 6) spins off this 7) spins off that 8) ... This is not "next Berkshire" behavior.

Part of the Berkshire story is to use cash flows to keep growing the number of streams of cash that together form the mighty Amazon. Spinoffs are kind of like the anti-Amazon strategy. By definition, it is unlocking value via an anti-conglomeration strategy. So that's what I meant -- it looks to me like the more he spins off, the less like "next Berkshire" it is.

You can of course still buy a 3 way incandescent bulb to replace you banned non-3way bulbs. The ban doesn't include them and they are much cheaper than LEDs. Personally, I've already swapped all of my non-halogen bulbs for LEDs and CFLs. But I know that people who shop only on price are going to buy the 3-way before the LEDs.

I think in the winter months, the big losers are the people who use radiant electric heating. Or electric furnaces. Absolutely ZERO energy will be saved (during cold spells) by switching to CFLs or LEDs. They'll just wind up paying more for those light bulbs with no compensating offset on the electric utility bill. They will only see their gains when it is warm enough to turn off the electric heater (after taking account for the lost heat from their lighting).

Suppose Seritage is spun out... Doesn't that spell THE END for the "Next Berkshire Hathaway" rumors? Those people then dump on the runup. So I think under the "hold forever" thesis of this being the "next BRK", it depends on Seritage to NOT be spun out. I'm not saying I'm right, I'm just trying to sort out these seemingly conflicting bullish ideas.

The heat given off by incandescent lights warms your house in the winter. So while wasteful, it is not 100% waste. During summer if you are running the air conditioner when you have the light on, that's when the full magnitude of the waste occurs. So homes will now be colder in the winter. More natural gas will flow to the homes. But perhaps less consumed by the electric utilities. However, considering that electric utilities also burn coal, then perhaps this ban leads to an overall increase in natural gas consumption and an overall decrease in coal consumption. Then in the Northeast, I believe heating oil is still relatively common. I presume people will need to purchase more heating oil now to warm their homes.

Luke, How do you hold your SHLD? There are a couple of approaches. A) Straight shares B) Straight shares + Lending income C) Write at the money puts and purchase at-the-money-calls (you get upside leverage here because the two are not in parity with each other) Other style?

It looks like you can only deduct up to $2,500 of student loan interest: http://www.irs.gov/taxtopics/tc456.html The interesting thing is that it's kind of like a business. You borrow money to purchase your education, and your true "profit" is the spread between your income and the cost of buying that income (your education). Therefore there should really be no limit to how much student loan interest you can deduct. After all, you aren't really making any money for yourself on every dollar you pay in student loan interest. Your "net profit" is your income less your student loan interest. It's a bit like if the government put a limit on how much bond interest expense a corporation could deduct. What if SHLD wasn't allowed to deduct it's interest expense from it's revenues? It would be taxed on revenue, not income. That wouldn't be fair either.

100% is the most concentrated. Several times since 2006 I've had 50% declines from earlier peaks. What was the stock or option that you had 100% into? That sounds amazingly stressful if it goes 50% down. Okay, here is an example: I had a 50% decline (in net worth) peak-to-trough in March 2009 at the bottom of the market, versus the peak that was hit after the short selling ban in late 2008. The decline was stemmed by the strikes I had on the leverage. So it goes from leveraged, down to a point of no leverage. From there, the stress declines as I can wait out that position forever at that point. Go back and remember what early 2009 was like. There was a company called Redwood Trust (RWT) that I had written some puts on in January 2009. The company traded for about $12, the puts were $10 strike, and the premiums were $5. So you could double your money-at-risk just by having the stock not decline below $10 from $12. I even wrote some $2.50 strike RWT puts for about 40% yield. Or another example... WFC was at about $10 in early 2009 (before it went to $8) and when it was at $10 the puts were like $4. So you could make a ton of money by the stock just not moving. Then LUK was down at around $16 and you could write the $15 strike put for $5. So while my total net worth was down by a ton, there were all these ways to make insane income from it. The annualized returns were so high that the total yield you could make was far higher than what you could make on your money if you had a lot more of it and the year was 2007 still. I had the Fairfax calls at-the-money at that point, so the bleeding had stopped, yet the calls could easily be paid for by the puts. You could have 100% upside in Fairfax but only 40% downside in these other names. Instead, I went to 100% downside in these other names and more than 200% upside in Fairfax calls. And a lot of that downside was out-of-the-money. The volatility premium on Fairfax was about 20% of notional value -- compared to what I mentioned as 50% on something like RWT. So when Fairfax eventually recovered, I wound up being way up on the year. But I wasn't leveraged on the downside. I just did some swapping around. Somewhere in this archive for this board there is a post from me in March 2009 describing what I was doing -- I had the Fairfax calls but I had written puts on GE, AXP, WFC, RWT, etc... I was pretty grumpy at the time -- I had a bad cold, I was on a ski trip to Big Sky Montana for the week and not really getting enough time to focus on the market. Had I been clear headed (not sick) and at home, I might have realized sooner that... the strategy turned out to be a mistake. It would have been far more profitable to buy WFC and AXP directly than try to write puts and use the premiums to buy FFH calls. The reason is... FFH didn't have their book value invested more than 50% into stocks. And they had slugs like JNJ which were just not going to move the needle. But I wasn't completely positive and I was scared -- so the FFH exposure was the best my courage could muster at the time. This is why I have developed the opinion that you should dump FFH at the market bottom as a means of increasing exposure to the rebound -- of course, don't do this until the market is actually at the bottom (a little humor). Eric- thanks for this. 2 questions: 1) for something like rwt, did you follow this for a while before premiums became rich and therefore had comfort with the underlying company? Or was this more "hunt for premium yield and wait"? 2) how do you think about true $$ at risk when selling puts on a company like rwt? I'm trying to better understand your thoughts on position sizing.... Thanks! 1) A mortgage REIT is regulated differently from an investment bank, so I didn't think RWT was a Lehman Brothers. I had heard about RWT for a while as it was relatively popular holding for (some) value investors before the crisis hit. The other names I wrote puts on at the time were WFC, GE, AXP, SHLD, LUK. I was trying to stick with companies that either were in the Buffett portfolio or which were at least having a lot of credibility (like LUK) from a lot of seasoned, competent value investors. 2) I just subtract the put premium from the strike price. So if the premium is $5, that's somebody else's money, not mine. When I write the $10 put, if the stock itself goes to zero it's not $10 I lose, just $5. So I have $5 of my own money at risk. Therefore, as long as it trades above $10 at expiry, I've made 100% on my money at risk.

Nationwide, about 12% of a home's power bill goes towards lighting, according to the EPA. Light bulb manufacturers will cease making traditional 40 and 60-watt light bulbs -- the most popular in the country -- at the start of 2014. The rules were signed into law by President George W. Bush in 2007. http://money.cnn.com/2013/12/13/news/economy/light-bulb-ban/index.html?iid=HP_LN The electric utilities aren't going to like this one :)

with this sort of reasonning , one would have missed Berkshire Hathaway In the 70´s You may be missing the nuance of the argument. I have been asking people for their "where" target. Do you sell after the first 50%, and then miss the next double shortly after? So you are going to miss the Berkshire Hathaway in the 70s anyhow if you don't know that the stock is worth a lot more than $100. Right, so is it? How much does Prevalou say it's worth? If you say $150, and sell it at $150, then you too are going to miss the Berkshire Hathaway of the 70s with that strategy, right? Or for you is this a stock that you won't part with at any price because it is the Berkshire Hathaway of the 70s?

Every time they raise the income tax rate, it effectively makes it harder to pay off the student loan. So suppose they give you a tax credit for principle repayment on student loans?

Actually, I just realized something that is completely unfair here. 1. Child takes out loan at age 18 for college 2. Works out wonderfully and he make $300,000 a year in Silicon Valley soon after graduation 3. Has to pay 50% income tax 4. Has to pay off his student loan with after-tax income. Huh? Why is he left to pay off the student loan when he only gets to keep 50% of his income? Why does the government feel entitled to half the income, but doesn't feel obligated to pay down half of the loan principle? That's a free ride if there ever was one.

The gift tax rules only come up because you are taking the money out of your taxable estate when you put it into a 529 plan. However, the gift is revocable at any time (if you later decide your child won't use it or if you fear they'll waste it on parties). Should estate taxes be of concern to you (and you do want to leave money to your kids) then you wouldn't want to spend the funds from the 529 plan on their education. Instead, you would want to leave the funds in the 529 plan and pay your child's expenses for education directly out of your own pocket (further reducing your taxable estate). Then they can spend the plan's money on college for their own kids (and/or grandkids). These plans with such huge contribution limits are more about tax planning than college saving, if you ask me. But fair enough, if I educate my child the rest of the country will benefit from the taxes he pays or from the jobs he creates after he starts a company. Whatever. Or somebody else's company benefits from having an educated employee. So not paying taxes on the income that funds his education seems only right and fair since in a way his education is for the good of all.

A lot of 18 year olds are basically children still. It's why we don't let them drink.

That sounds like the root cause of the student debt problem. Lenders would be more careful who they lend to if there were threat of bankruptcy. The A+ student with an acceptance letter to the UC Berkley Engineering school would still be able to get a loan. The lender can be incentivized to guide the child with no worldly experience away from costly mistakes.

Once comfortable with the downside of SHLD, there is still the decision of whose upside to choose from. Somebody talked about downside around $40, and on the upside a double in SHLD over the next 2 years. But that seems hard to see the timeframe on because you don't know how fast they'll kick the Sears stores out of the real estate and turn it into a proper REIT. You get about 25.5% of at-the-money strike for accepting the downside of SHLD (Jan 2015 puts). You pay about 12.7% of at-the-money strike for owning the upside of BAC (Jan 2015 calls). So you can get almost 2x BAC upside while taking 1x SHLD downside. So perhaps it doesn't matter what the upside is of SHLD (the "where" and the "when") if you can somehow determine the downside is only $40. Personally, I'm not certain of it. But some of you are it seems. My little back of the envelope calculation I did for BAC yesterday put it at $21, and that's at only 13% ROTE. At 14% ROTE, it's actually $22.41. And of course that's right now. You add in earnings on top of that level. So they generate capital at the $2 per share per year level today (Using the DTA). So I mean, you've got about $4 coming in over the next couple of years. So getting to $25-$26 per share in two years. That's a lot easier to see the upside. It's 65% to 70% upside over two years, unleveraged. Now, by taking the SHLD downside in order to get leverage on BAC, it's about 130% to 140% in two years. That's with 1x SHLD downside leverage and 2x BAC upside leverage. So by no means are you done simply by answering that SHLD has no downside from here. You still need to ask whether SHLD is the right upside from here. You really do have a choice -- you can't just stick your head in the sand and answer that your downside is protected. I'm sure the board can find better upside than BAC -- I'm just sort of a one trick pony here but bringing it up to raise a point that if you can't put a finger on the SHLD upside, then why do it? Why not buy the upside of something you can put a finger on -- maybe you get more certainty of upside, and it's leveraged since SHLD puts can bag you a lot of money with which to go shopping for upside elsewhere.

Going back to the headlines of those days, you had people who didn't want to invest because they thought market would go lower.