ERICOPOLY

Unfortunately, with a huge bank like BAC even the ground under my feet seems blurry to me… And honestly I cannot say if it is solid rock or quicksand… Just do once again something stupid like the Countrywide acquisition or the Merrill Lynch acquisition, and we go from solid rock to quicksand in a matter of days… Without great confidence in its management, I cannot invest… No matter what the reward might be. Gio Well, pick up a newspaper -- the banks can't make any acquisitions if they hold more than 10% of the deposits. Fairfax however, can. You want to read up on the C&F and TIG post-acquisition epoch.

Sometimes I'm paranoid that the fund managers at Fidelity are tail-coating me (and I'm a tail-coater too). I too increased my BAC around $13.90. I know that sounds moronic to say, and egotistical, but there have been a few coincidences like this.

During the summer of 2008 I read one of Jim Cramer's books. The only interesting thing I found in there is that a trader once taught him to periodically just sell everything, go to 100% cash. Then, reconstruct the portfolio. The idea being that you tend to hold some positions just for psychological reasons that are no longer there once you are in cash. It clears your head was his point.

How safe is it to just buy the common stocks and not write calls? The expiring option premium cushions the fall. Without the option premium, you take the full brunt of the onslaught. So, how did it do? Relatively better during the fall, relatively worse during the rally (the market rallied so hard that you would have done better to not write calls).

Not behaving purely rationally is being human.

This sounds a bit positive: Lawyers for the bank, the 22 institutional investors and even the judge questioned Levitin's expertise on the customs and practices of residential mortgage-backed securities trustees. "If I think he goes over what his expertise will show, I just won't give it that much weight," Justice Barbara Kapnick said on Thursday. http://finance.yahoo.com/news/last-witness-testifies-against-8-212427897.html

Yellen says stocks are not in a bubble: http://blogs.wsj.com/moneybeat/2013/11/14/yellen-on-stocks-this-isnt-a-bubble/ When asked specifically whether there is a federal role to support the stock market, Ms. Yellen provided a one-word answer: “No.”

Suppose you fat fingered when you were logged into your account and somehow instructed the broker (by accident) to sell everything. Then you would be in cash. Are you saying you wouldn't buy back everything you currently hold once you realized your mistake? If you would, then you are a buyer at these prices, obviously, because you would in fact be buying at these prices. And wouldn't this be true at any valuation? On any day that such a fat fingered mistake is made? Taxes aside of course.

What I meant is that you could swap that 20% position for cash. Then you would be in cash, with no position. But you choose to hold a 20% position, so you implicitly are saying that if you were in cash today and held no position, then you would be a buyer of a 20% position at the current prices. Therefore, if you hold then you are implicitly a buyer of that 20% position at these prices. That's all I'm saying :) Thus, if the management is to buy some shares back, you can hardly fault them as you yourself are also a buyer (implicitly) of whatever you hold. Unless of course you only hold for tax reasons. And if you don't want more ownership of the same company for allocation reasons, you just sell an offsetting amount and get the cash without paying as much tax on it (unless you are Buffett).

LTBH = Long term ___ Holdings? I presume there is no getting around the put writing premium being short term holdings though right? With a high marginal tax rate, that is pretty killer on after-tax returns. For taxable accounts, it is extremely lame that gains from expiring (that you've written) puts are always taxed at short-term basis (regular income tax rate). Instead of writing the cash-covered puts, you can write covered calls. This way, when you make a gain it can come in the form of a long-term capital gain on the underlying stock. Example: Buy BAC share at $15 and write $15 strike call for $1.50. If underlying stock finishes at $16.50 or higher, you have a long-term capital gain on the common stock when you close it out after 12 months. So you made the profit, but you took the profit as a long-term gain. This works great when there is put-call parity so no special advantage to going to puts route.

Well, good for you that you have come to know something like BAC so well, and are so sure about its future prospects. Unfortunately, I don’t know that bank so well, and I don’t have your kind of confidence. Therefore, I cannot invest in BAC. Are there other businesses in which you have great confidence and which still provide a 14% earnings yield? Thank you, Gio Nope. No other companies that I have great confidence in yielding 14% (though I'm sure they exist). Of course, it's not that I'm sure about BAC's future prospects -- it's that I'm sure about their present prospects. No growth, just a conservative balance sheet on which to earn a conservative spread. Nostradamus looked to the future, I am looking at the ground right under my feet.

No Eric, I repeat: I’d rather bet on a 7% by FFH than on a 14% by myself. That’s all! Business is business for me. And the heart has nothing to do with it. I can assure you that! As soon as I stop believing that FFH might achieve a 7% more easily and safely than I can achieve a 15% by myself, I am gone. Period. That time has not come yet. Gio I've mentioned before in a prior discussion with you, I'd rather take an operating yield of 14%. To each his own.

The government could offer the inflation-protection feature of TIPS on all Treasury bonds issued, but they don't. Hmm... why? The government calculates CPI, but they don't give you a deduction for inflation losses when you report interest income. Why? Why does the government tax you for the inflation adjustment offered by TIPs? These would be simple things that the government could do with a stroke of the pen without resorting to going back on the gold standard. It would mitigate, but not entirely solve the losses from inflation. But I've never heard any of these proposals. It seems like... inflation is one of the main policy tools to redistribute wealth. You know, we hear things like Mitt Romney only paid 17% tax on his income. But what if his income were fixed and he earned a 2% yield in a 2% inflation environment. Didn't he (under that scenario) really give up 100% of his income in a wealth redistribution?

That's why FFH is fully hedged and holds a lot of cash today! ;) Gio You have a lot of great quotes, and I don't -- but I'm trying to think of the one that says something about a man being guided by his incentives... or his heart lies where his treasure lies... something like that.

Isn't it below the 15% that you are making long-term in Fairfax?

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%. That's a very good point, too, Eric (as always from you). If you don't mind me asking, how are you currently positioned and getting to that number? I'm guessing you still have a lot of BAC that's mostly hedged. That number come from BAC's earnings pre-tax about $1.90 per share -- which is the pre-tax consensus earnings among the 20 or so analysts. The DTA provides the restorative boost while the after-tax net income figure rises with resolution of the legacy issues in runoff. And it requires no growth... it requires below-mean performance from the bank. Reversion to the historical mean would deliver much better earnings. This is hardly the flood tide!

Well, but I didn’t say the S&P500 earnings cannot surprise on the upside, did I? They certainly might! And I hope so! :) I just said I think it is useful to know what the tide is probably going to do: --William Shakespeare Gio This is a pretty crappy flood tide. Did the ocean get drained?

Unfortunately, future earnings are not a sure thing. I am not sure what the businesses I personally manage each day will earn next year, and have absolutely no clue what they will earn 5 years from now. Gio Unfortunately, future earnings are not a sure thing. Your post is based on a forecast of what the entire market will earn over 10 years. Somebody brings up a counterexample are you reply the future is uncertain!

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%.

I remember about 13 years ago when star individuals left the Windows division on the main campus, and took jobs over in the MSN division on the "Red(mond) West" campus a few miles away. The idea being that stack ranking is easy to master when the other employees are orders of magnitude less competitive than those in the Windows division. But you didn't want to outright quit, because you still had unvested stock options. You just wanted an easier waiting period. The joke was "Rest and Vest in Red West".

Where would you find the corruption though? Wealthy people are getting after-tax fixed income yields below the rate of inflation. Is the wealthy class supposedly in charge, and if so why have they rigged this game against themselves? It looks to me, based on how fixed income is taxed, that the wealthy are being thrown under the bus. The simple fix for this would be to allow a tax deduction based on the CPI, so you would then only be taxed on your real income (on an equal plane with the wage earner). But here, in the current system, the wage earner has the clear upper hand. EDIT: Then look at our corporate tax rates compared to... the UK. Look at our double taxation of dividends. How can anyone with a straight face argue that this is how wealthy would do things if they were truly in charge of power? Yes, and the wealthy love paying the property tax and the inheritance tax. There's practically no end to the taxes on capital. If the wealthy control the "cops", it's the "keystone cops" version.

Well, that's the trouble. Meanwhile, I'll do my best to defer the gains until I can claim tax residency outside of California.

So you don't take any short term taxable gains? Then I can see your point. Yes, if I'm selling a short-term holding to offset a dividend then I pay a tax rate that puts the dividend at the advantage. At that point, I wear Buffett's hat and declare a Jihad on managements that don't do what's best for me when they buy stock at high prices. You just have to look at his incentives to predict what that man is going to say. But then I settle down, because the bulk of my holdings are long-term and with my expiring puts they wipe out any such relatively small short term capital gains. So then I take Buffett's hat off and once again remark how buybacks are the most democratic way of returning cash to investors.

I have a math degree and you have an engineering degree. Somebody who knew only those two things about us might guess that you probably prefer doing things by a process so as to be ISO9000 compliant, whereas I make decisions based on whether 19 is less than 33.

The first three things you say, (#1, #2, and then the following sentence), indicate that you might as well buy your current holdings even if you presently didn't own them and held cash instead. The last thing you said doesn't make full logical sense because you have elected not to mention that you can sell an offsetting amount of shares and therefore get your cash all the same without altering your percentage of ownership in the company. So this argument that you wouldn't be buying MORE is irrelevant, because you are free to manage your percentage ownership of the company. Plus, I said if you hold it today you could go to cash and buy it back -- that has nothing to do with MORE. It is all about SAME.