ERICOPOLY

I wrote that RWT put with $10 strike for $5. Stock was at $11. The stock barely scraped the strike price briefly. So you double the $5 you are risking if the stock merely stagnates. Now, considering that it is a "volatility" premium, consider that RWT was one of the least volatile stocks I tracked coming out of the crisis. WFC is up 5x off it's lows, RWT is up less than 2x. I remember the $25 strike SHLD put went for $10. You could make high returns if stock prices merely went sideways. And yet if they plunged a lot more, you might not necessarily lose.

There was also the December 2007 peak to the low that was hit the day before the 2008 short-selling ban. That was about 40%-45% drop. Then in 2011, the April 4th net-worth peak (the day I went in for foot surgery) and then it dropped 50% (almost exactly) to the December low when BAC was bumping $5. Alright, now would those highs have ever really been there in the first place were it not for my style of investing? Of course not. So I only "lost" what others would only have made in a parallel universe. Do you count your parallel universe losses as real losses?

bmichaud's gave a price estimate and a suggestion for when to sell: Yes, thanks bmichaud. You can't invest if you don't know the price you are waiting for. I take it that's what they are saying and it's my "where".

I think he's saying that Koreans of all income levels generally value education more than low income American families. Which over two or three generations would make the Koreans quite wealthy, just as you say. I think the whole thing is dominated cultural influence (in other words, the parents). Can we compare the test scores of Koreans educated in American public schools versus the test scores of Koreans educated in Korean public schools? Then you would at least strip out some of the cultural influence and can better isolate whether the schools themselves are the problem. I would find it interesting to see how their test scores stack up against the world. You might even take the test scores from public schools of non-affluent Asian neighborhoods in Los Angeles.

Yeah, thanks. I like that metaphor too. Han Solo: [laughs] Hokey religions and ancient weapons are no match for a good blaster at your side, kid. Skywalker: You don't believe in the Force, do you? Solo: Kid, I've flown from one side of this galaxy to the other. I've seen a lot of strange stuff, but I've never seen anything to make me believe there's one all-powerful Force controlling everything. There's no mystical energy field that controls my destiny. [Kenobi smiles] Anyway, it's all a lot of simple tricks and nonsense. Kenobi: [gets up and takes a blast helmet] I suggest you try it again, Luke. Only this time, let go your conscious self and act on instinct. [puts the helmet on Luke, which covers his eyes] Skywalker: But with the blast shield down, I can't even see! How am I supposed to fight? Kenobi: Your eyes can deceive you. Don't trust them. [remote shoots Luke] Stretch out with your feelings! [Watches Luke succeed in blocking the lasers] You see? You can do it. Solo: I call it luck. Kenobi: In my experience, there is no such thing as luck.

My best friend is Korean and he said even the poor kids feel academic pressure from their parents. You don't see that as much in the poor communities in the United States. Yeah, does the following statement make any sense? The University of California is crammed with Asian students because they are the richest demographic in American society

BAC seems like T-Ball. The value is just sitting there on a T, easy to see. I have a feeling of the where, and the when. SHLD seems more like Luke Skywalker wearing that helmet thing that shields his vision and trying to use the force to swing at the moving ball shooting lasers at him. Nobody is telling me what the price is that they would sell it for. Is that because nobody really knows?

Ahh... sorry. Well, like I said, I hate working in fractions. So I would just divide the warrant premium by the number of shares. Then that would give me the per-share premium. So if the premium were 40 50 cents and it was converting to 1.25x shares, then I guess that would be a 30 40 cent premium per share. Then you use the formula plugging in 30 40 cents for the option premium, and whatever the new strike price is at that point. EDIT: Fixed the numbers

I am saying that if you run the equation today on the WFC warrant, it will spit out the correct answer because it doesn't matter if you give your dividends to the Pope, or if you reinvest them into the stock. All the share conversion adjustment does is give credit to the fact that you've reinvested it into the stock rather than having given it to the Pope. So ignore it.

So am I... formerly a senior accountant. Math is probably the reason I love baseball so much. Anyway, the stock price? I have no clue what it will be in 2013 or 2014. I was referring to the business as the puck, not the share price. You referred to the NAME of the (Berkshire Hathaway) business as the "where" for the puck. I'm referring to the PRICE that's it's worth. No, not what the market says it's worth, but what YOU say it's worth. If you don't know, then how do you sell it for a fair price? I'm referring to the price where you sell it. For me, it's 12x earnings for BAC -- that's 12x the post-cancer-removal earnings. So I will calculate that for you based on 13% ROTE on today's tangible book value to put my money where my mouth is: 2014 earnings $1.40 2015 earnings $1.60 2016 earnings $1.80 (this is the post-cancer-removal 13% ROTE) So 12x multiple on 1.80 = 21.60 less 40 cents for 2014 less 20 cents for 2015 Roughly $21 is what I think it is worth today at what I think is about fair multiple of 12x. So... what's your price on SHLD?

You just agreed (above) that it doesn't matter to the banker what you invest the money in that you borrowed. You only owe him interest on the money borrowed.

It would be the same as with the GM formula. You just treat 34 cents as the missed dividend cost expressed as a percentage of the strike price. You'll get a more accurate leverage cost estimate as compared to GM. After all, GM won't keep a dividend at 1.20 for each year -- they would raise it a bit each year. But WFC's lost dividend cost is capped at 34 cents -- so it doesn't have the complexity of the GM case. So here is what we used for the GM formula (an approximate result it spits out): 17.65*1.x^5.5=18.33*1.065^5.5 You would just rework it with WFC's numbers. using the maximum lost WFC dividend yield on the right hand side of the equation. So if the WFC strike price were $38 (I'm not sure if it is, but just for an example) then the missed dividend yield would be 3.57%. Thus, you would have for the right side of the WFC equation: =38*1.0357^5.5 Assuming 5.5 years left on the WFC warrant and 38 for the strike (I think both numbers are different, but I'm too lazy to look them up)

This is what I was asking when I asked where the puck is going. You suggested the puck is going to a Berkshire Hathaway style destination. That's not the type of "where" I'm referring to. I'm a numbers man. I want a "where" in terms of a price. If you don't know what the price is of where the puck should settle, then how are you going to capture the right amount of value (sell at the appropriate price) so that you are compensated for the amount of waiting you endured? You say the price ought to rise sharply. But 50% rise in a week is a sharp rise -- that does you no good if you sell it before it goes up 100% over the following month (and stays there, because that "where" the value really is). So it makes sense to put a number on "where" -- otherwise you'll never know when to sell. And of course you don't even know what your reward is versus the current stock price if you don't know "where" the puck is going.

Aren't there options that SHLD is pursuing that won't necessarily care about the cash flow of certain properties (data centers, disaster recovery centers, etc.)? A property put to use as a data center will create a cash flow (one would certainly hope so).

See, if assets have value of $400 per share, but are going to be sitting completely idled for 7 years... Then present value is $200 (at 10% discount rate). So it makes no sense to me to just say "well, I know the assets have value but I just don't know when they'll be put to good use". That's doesn't necessarily create any margin of safety because you haven't demonstrated any kind of a present value discount while you wait an unknown quantity of years for the cancer to be cut out. You could have a holding company with $1,000 locked up in cash yielding nothing. But if you believed this cash would neither be invested nor distributed for 50 years, then the value of shares in this holding company would be what? You can't say anything below $1,000 provides a margin of safety. You have to first know when it will be put to good use, or liquidated. Only then can you get a value and thus determine what your margin of safety might really be for a given market price on the shares.

We all know it's too early to know that until they make more progress. Just speaking in terms of leasing out space, I think it is a very safe bet that they would be able to lease at multiples higher than the amount they are currently paying per square foot. How does that translate into EPS? That remains to be seen. Assets are worth what they generate. So we don't know what they generate? Marty Whitman has written about how value is overlooked by focusing too much on what assets generate in income. Especially assets that are carried at historical cost. That said, Third Avenue is not a SHLD shareholder IIRC. I can hold a vacant lot that isn't generating value income today. Yes, it still have value even though it has negative cash flow from the property tax. But if you were going to buy it from me and develop it into a new use, wouldn't you want to first estimate how much cash flow you would get from it before embarking on that redevelopment project? And that's all I'm asking -- you are going to redevelop it, that will generate a cash flow, and then you'll be able to put a capitalized value on it. So I'm just asking what that value is.

Assets are worth what they generate. So we don't know what they generate? Generating significant rental income now? No. I'm not looking only at where the puck is, but more on where it's going. And where is it going? "Where" is a destination, not a direction. That's what I'm trying to tease out of you. I'm just getting vague ideas that their leases are too low. How high is higher? And what have you done to translate that into a concept of magnitude of profit per share. I hold my BAC because I know what it will generate after expense runoff. And I have a timeframe in mind -- near term, less than 2 years. But how do you stick with SHLD when you don't know what the profit will be, or when? You can surely double your money in WFC in 7 years or less -- perhaps 5. And it's safe and comfortable to own. So in order to chose SHLD over WFC, you've got to have a lot of conviction, right?

Why is anyone still invested in ESL? Let's say you guys are right and he is selling everything in ESL except for SHLD. Then why pay Eddie a cut on SHLD's future runup, when you can instead just cash out of ESL and own SHLD directly?

We all know it's too early to know that until they make more progress. Just speaking in terms of leasing out space, I think it is a very safe bet that they would be able to lease at multiples higher than the amount they are currently paying per square foot. How does that translate into EPS? That remains to be seen. Assets are worth what they generate. So we don't know what they generate?

How much profit per-share do those assets then generate after the cancer is removed. Even a mediocre/average bank can earn 13% ROTE, so that puts $1.80 as the per-share floor of what BAC can earn. What's the equivalent computation for SHLD?

I think that is what Lampert is figuring out with segregating the company into different divisions with separate P&L, BOD, etc. You, the investor. What has Luke determined to be the cancer and what is the patient post-surgery? I want you to tell me your secrets because I want to make money here possibly. I'm perfectly free to tell everyone my "secret" thesis behind what the BAC cancer is/was -- it only benefits me for everyone to know because I don't get hurt if the stock reflects the true value. But I can't explain why you would wouldn't just be free to tell me in one sentence what exactly the cancer is and what's the good business lying behind it?

Another simple way to think about it is that the lender is letting you borrow $13.30 per class A BAC share. His conditions are that the interest rate is fixed and that you prepay him all of the interest. So your cost of interest on that $13.30 is a static cost. It's simply the interest you owe for borrowing $13.30. Now, compare that to borrowing $13.30 from your local banker. Does he charge you a higher interest rate if you invest it in BAC shares and then reinvest your BAC dividends into more shares? Of course he doesn't -- he charges you interest rate on that $13.30 no matter how you invest it. You could give it to the Pope and it still is going to be the same amount of money you owe in interest.

You can think of BAC common stock as being logically identical to a warrant with 0 strike and full dividend protection (adjustment). My formula computes the cost of leverage of BAC common to be zero. This is the correct results. It's correct because there is no option premium to the common, and there is no loss from dividends. It does not matter at all how many shares this common (with full dividend protection) converts to in the end.

The reason why it works for the BAC warrants is because you have two independent costs. The option premium has nothing to do with the costs from lost dividends. And with BAC, the only lost dividend is 1 cent per quarter. So the formula works almost perfectly at approximating BAC "A" warrant cost of leverage, except that it will be off slightly for not taking into account the prices at which the lost 1 cent dividend quarterly dividend would be invested in to the common. I'm compounding that lost dividend cost (against the strike price) which is slightly wrong because it depends on how many new common shares could be purchased with that lost 1 one cent dividend. But... it will be damn close. That 1 cent dividend can't purchase many shares so there is little to be skewed. Now, if the BAC class "A" warrant had a 0 cent adjustment hurdle (rather than 1 cent), then I believe the calculation would be perfect. After all, you start out with the option premium being your only cost -- and that's the only cost truly because there is no lost dividend.

You are making my head hurt forcing fractions into my thinking. So I'd rather just "unfraction" and reverse the Citi split and then solve. Sort of like if you asked me to compute the rate at which 0.1 grows to 0.2, and if I didn't want to deal with fractions, I would just multiple both by 10 and then solve. I'd get the same result either way. In math you can multiply both sides of the equation by 10 and you aren't screwing things up -- you just make things easier to think about and work with.