ERICOPOLY

Hmm... I think that came off the wrong way. I was trying to put emphasis on my not having the right toolset to evaluate the winners from the losers in the reinsurance space. Thus, I would be just as likely to pick another MRE because I don't know what to watch out for when reading the 10-Qs. I wasn't trying to infer that I see anything wrong with Dan Loeb's company -- rather... I don't know where to look to find such bad things, and that's what makes me nervous. Somebody asked me what I thought of it, TPRE, and I just pointed out that I'm not the guy to ask.

How about BPOP? It is quite similar to BAC but I think it has a higher upside. I haven't been looking. I know there must be better opportunities out there, but I'm sitting tight and aside from a couple of good calls I'm a fairly below-average investor in terms of spotting a good company from a bad one. I don't want to go back into the jungle, too much tiger in the jungle -- I just want to stay with the boat. How about TPRE then? It is a similar model compared with MKL, except that it is younger and all assets are invested in Dan Leob's hedge fund. It's once again a problem -- I have only ever done really well when I cherry picked ideas from others. On my own, I can't really sort out one investment from another. First I need the rubber stamp from some investment legend... like for example when Buffett invested in BAC... then from there I build up confidence if the investment makes sense to me after I spend a lot of time looking at it. So I hardly even know who Dan Loeb is, and I don't know how good he is at reinsurance. I remember when Montpelier Re lost 70% of shareholder equity in a single quarter -- I don't want that kind of result.

You can raise crickets in a box in your apartment. Don't need green pastures for protein :D +1 but eww. :o Then no Chocolate Chirpie Chip Cookies for you! http://www.ent.iastate.edu/misc/insectsasfood/chirpie.html

How about BPOP? It is quite similar to BAC but I think it has a higher upside. I haven't been looking. I know there must be better opportunities out there, but I'm sitting tight and aside from a couple of good calls I'm a fairly below-average investor in terms of spotting a good company from a bad one. I don't want to go back into the jungle, too much tiger in the jungle -- I just want to stay with the boat.

You can raise crickets in a box in your apartment. Don't need green pastures for protein :D

They would be trading at roughly 1/2 the P/E of the S&P500. Why?

Is undervaluation really in question? You don't normally have conservative, low-risk companies like WFC and BAC trading at double-digit earnings yields.

Why is WFC priced at 10.1x 2015 earnings? It shouldn't be that easy to make double-digit returns when the market as a whole trades at 19x earnings. WFC is not a risky company.

What does Wells have anything to do with it? I don't understand.

Interesting. They expect $1.40 per share in 2014. Utilizing the DTA, it comes out to $2 per share. They expect $1.60 per share in 2015. Utilizing the DTA, it comes out to $2.28 per share. They put a price target of $15 on it. That part I can't figure out given the above. By their own admission it's only 9.4x their 2015 estimate... in a market trading at P/E of 19x? I would think you would begin somewhere around 12x earnings, or $19.20.

He also said credit quality is the highest in his 33 years at the company... Expressed differently "we've cut off credit to many people who would normally have been given credit throughout the other years that I've worked at the company. This had led to a higher quality mix of credits".

So an 8.27% decline in shareholder equity from a 200 bps rise. In the meantime, how much book value boost annually does the current level of interest income contribute, after tax? The harder part is knowing how long these low rates will last -- each year it continues, it leads to less BVPS growth. I imagine it's worth somewhat of a discount given that it leads to slower BVPS growth, but how do you come up with that discount without knowing how long rates will be low for? So perhaps the market is making an assumption of 5 more years. In that case, and if the low rates are retarding growth in book by 3% annualized, that would be worth an additional 15% discount, roughly. But I pulled that 3% number out of my butt -- does anyone know what the real number is? Eric, let me know if I have any flawed thinking here on the impact of a rate rise. Let's say MKL (or ExampleCo) is currently doing a 10% ROE and priced at 1 P/B at $100 a share. Then there is a 200 bps rate rise and let's say BV goes down 15% (greater than what's shown above) for a BV of $85 a share. However, because investments are levered by 2 - 3x the 200bps rate rise results in ~5% increase in ROE. So now they are at 15% ROE and the market re-rates to 1.5 P/B. This would be a price of $127.5. So we would want to buy at the bottom of the cycle as long as the price is low and the tradeoff between their decrease in BV vs. increase in ROE is there. Owning at the top of the cycle is the polar opposite. You have an increase in BV, but a lower multiple due to a decrease in ROE. I see your point that the rising interest rates will help the stock earnings (and thus stock price) more than it will hurt the balance sheet. The earnings though seem weak until it happens. It's similar to how I view BAC -- rising rates will help it more than hurt it, but in the meantime that stock trades at a much better earnings yield than MKL -- so you still do great if rates don't rise for a long time. So that's the weakness I see with MKL -- it is too dependent on rising rates. MKL is competing for a spot in my portfolio, against BAC -- that's why I pit one against the other.

Yes but I can blame them when the investments don't go up. That's the benefit of the Fairfax shareholders -- they can just blame Prem for hedging when the market goes up and they miss out on the rally (even though they knew for a long time that he was hedging). Prem is providing a service to them which is protecting themselves from self-loathing, they just don't quite see it that way.

I haven't made an effort to educate myself on this. I'm just coasting on the BAC idea and I want to offload much of the management of my money to others once BAC works out. I actually endure a great deal of stress over all this stuff and I just want to put it behind me rather than spending another decade like this.

I'm finding what I need in BAC. It just clicks. Eric, why are you 100% (or highly) hedged in BAC and willing to pay the interest on your margin account? If you are so confident about the prospects, why not just buy without hedging, and use the freed up capital elsewhere? The hedging is to protect the margin loan -- making it effectively non-recourse debt on the day that the leverage was put on. It's a bit like asking someone why they would own a warrant if they were confident -- the warrant is leverage with an embedded hedge that makes in non-recourse leverage. But you're hedging everything, not just what you bought on margin, right? Like if you own 300 shares, 100 of them bought on margin, then you would only need 1 put contract to hedge the loan. So I'm wondering why are you hedging everything? The reason for warrants or options (at least for me) is so I can save capital to use elsewhere. I have puts that protect my margin loan -- they were at-the-money when purchased. I have puts (further out of the money) that protect a given level of net worth -- I'm effectively retired and need to have a set level of guaranteed accessible liquidity. Today I had Nov BAC puts expire with $7 strike and $11 strike. People talk about how they are in cash because the market could drop 90% like it did in the Depression, blah dee blah dee blah blah blah. They just need to buy insurance for that and shut up -- would they never be homeowners if they constantly worried about a guy who's house once burned down, or would they just buy insurance and go ahead with the home purchase after all?

At the top :D

Precisely.

Yes.

I'm finding what I need in BAC. It just clicks. Eric, why are you 100% (or highly) hedged in BAC and willing to pay the interest on your margin account? If you are so confident about the prospects, why not just buy without hedging, and use the freed up capital elsewhere? The hedging is to protect the margin loan -- making it effectively non-recourse debt on the day that the leverage was put on. It's a bit like asking someone why they would own a warrant if they were confident -- the warrant is leverage with an embedded hedge that makes in non-recourse leverage.

So an 8.27% decline in shareholder equity from a 200 bps rise. In the meantime, how much book value boost annually does the current level of interest income contribute, after tax? The harder part is knowing how long these low rates will last -- each year it continues, it leads to less BVPS growth. I imagine it's worth somewhat of a discount given that it leads to slower BVPS growth, but how do you come up with that discount without knowing how long rates will be low for? So perhaps the market is making an assumption of 5 more years. In that case, and if the low rates are retarding growth in book by 3% annualized, that would be worth an additional 15% discount, roughly. But I pulled that 3% number out of my butt -- does anyone know what the real number is?

The market seems to lower the P/B at the bottom of the cycle and raise it at the top. I think the bottom is the place to be. Pricing is a little less competitive due to low rates as well because it would need to improve in order for insurers to hit acceptable ROEs. If ROEs are low, capital exits. Doesn't the bottom drop out of the book value in a rising interest rate environment that is both punishing to their stocks and their bonds? So, I suppose, is the stock trading at a bigger premium to book than it looks if you re-price their book based upon a 5% 10 yr rate environment. I know for example that a 10yr bond earning 3% suffers a 20% loss if it is re-priced to a 5% yield.

We already did that. Last week it traded down to 3 cents above tangible book value. Look at a 1 yr chart -- it was right about now a year ago that it took off. http://finance.yahoo.com/q/bc?s=BAC+Basic+Chart So, been there and done/doing that.

He could have bought a lot more, and he still can. Can't he buy until he gets up to a 10% total ownership stake?

Because the unleveraged returns from common stocks isn't enough, you've got insurance float to leverage it and get rich faster. And that doesn't add risk?

Well, I guess the rules of the game are constantly changing… I don’t like to think about rules that regulate a business as the reason why management won’t make big mistakes in the future… I much prefer to have faith in management’s process and abilities… But that’s me and only me! Just wanted to explain why I have such an hard time investing in BAC and others. Gio I like to know that it's illegal for them to make another acquisition. Faith is all you can go with sometimes, but in this case it's not necessary to have any faith. You have law! This also changes the culture, as the guys who get their jollies from making deals have been leaving the company (Moynihan recently commented on this). They can only grow organically, it's brilliant! Even Prem & his team reached for faster growth when they acquired TIG and C&F. Once bitten twice shy, or are acquisitions in their very nature. They are deal makers... the very name of the company is Fair and Friendly Acquisitions.