ERICOPOLY

Actually, what I am looking for is a decent rollover IRA account. IB cannot lend out shares in IRA accounts, and they charge $7.5 per quarter, which is not big fee though. I think the only advantage for IB's IRA account is that its foreign stock trading is quite nice. By the way, in Merrill, if you sell a stock, would you be able to use that unsettled cash proceeds to buy a stock? I can do this in Fidelity cash account, but for IB, I must have a margin account to do this. What about Merrill? BTW2, What about Merrill's international stock trading? Do they have that? I saw you mention trading on "unsettled cash proceeds"... You might want to learn about "limited margin" for your IRA account -- yes, I did just use the words "IRA" and "margin" together. This is from the Fidelity website: https://www.fidelity.com/viewpoints/active-trader/how-to-use-margin Limited margin Limited margin allows a client to trade on unsettled funds without triggering certain trading restrictions, such as good faith violations in an IRA account. Good faith violations occur when an account purchases a position on unsettled funds, and sells the position before the settlement date of the sale that generated the proceeds. Limited margin does not allow for borrowing against existing holdings, account leverage, creating cash or margin debits, short selling of securities, or selling naked options. At Fidelity, limited margin is available only for traditional, Roth, rollover, SEP, and Simple IRAs. IRA accounts with an FDIC core are ineligible. So, if clients want limited margin, they may need to change their core for that account. Moreover, clients must have an investment objective of “most aggressive” and should be aware that all day-trade rules will still apply with respect to requirements and liquidations. This includes the $25,000 minimum equity requirement.

That's the primary thing I worry about. Similarly, you might take out a business loan to expand your production... what if the economy tanks and the anticipated demand never comes? You still need to keep paying interest on that debt. In all matters of business, that's the worry with debt... can you afford to service it while you wait for things to work out? However, it remains the only non-recourse form of leveraging stocks. So there is no other game in town. Fairfax doesn't use their float to leverage stocks, they use it to leverage bonds... so nobody can pull that one up as a counterexample.

Bump... Eric? You say you are doing this in a margin account. The question is this: Does your broker match the puts and calls, or are you just working it out that way on a one to one basis? See reply #476 above. I just buy the puts trading online, and then I buy the common a moment later -- there is no other special communication between me and the broker.

Regarding the selling of the common... I might gradually roll the strike up to ever-higher prices over the years, and spend the money from capital gains tax-free. For example, why sell the stock and use the after-tax proceeds to buy a house when instead I can just hedge with a put and borrow against the shares? The bank's earnings will exceed the cost of financing these puts, and maybe I'll just keep rolling out the tax bill until I die when it's tax free.

That's too bad. My kids who are gifted were correctly identified by our pediatrician :) Here is a video of the public elementary school where my kids go: Complete with narration by one of the parents (Billy Baldwin).

The broker matches the puts with the margined common stock (you said "calls" but I'm not using calls). It's a portfolio margin account where they net out the risk, which gives more margining power because you don't really have any downside below the strike price except for the value of the put option premium. There are two types of margin accounts: Reg-T, and "Portfolio Margin". The first one is the default for margin accounts. The second one you have to request for approval, which is what I did. So if I have common stock matched up with a $12 strike put, they effectively give me the same margining power as if I'd had a $12 strike call instead. They are looking at margin risk on a netted out basis. This wasn't possible before when I had the "Reg-T" default margin account.

Eric, thanks - just curious though, and apologies if you already explained this in this long thread - how does this compare to simply buying Jan 2016 calls? That's the whole idea -- I'm reconstructing a call using common stock and puts. This is in a taxable account. Try rolling appreciated calls -- oops, it's a taxable capital gain when you sell one series to buy the next. I intend to write off my worthless puts against gains taken elsewhere. I just need to be sure that when I roll them I don't create wash sales.

We already have public schools for all, but we're concerned that many of our gifted children are underserved. So can we identify the gifted children pre-K and send them to special schools? I know we have tests that can identify gifted children. What is holding this up?

And if I successfully select undervalued stocks that soar and stay that way, the cost of the non-recourse financing will be extremely cheap... this is because once the stock has appreciated substantially the cost of rolling the puts goes down. It's only expensive for the initial time period until the stock soars. Then it gets really cheap afterwards. And the whole time it's non-recourse. I mean, these puts cost less money than BAC is generating on a per-share basis. So with patience, the strategy will pay off.

I have a leveraged position. But this is margin debt, so to make it non-recourse I buy puts. Long a share of common, using debt, but also long a put. Thus, the most I stand to lose is the cost of financing... because the loan itself is non-recourse. It's like buying a home where you put zero money down, and walk away if the price goes down. Except I'm doing it with common stocks instead of real estate, and I'm partically prepaying the cost of the non-recourse financing (the cost of the put).

Let me answer by saying that I wouldn't have this bias against the warrants if I believed the stock to be fully valued. You see, I believe the earnings will improve over the next 18 months. For that reason, I believe the stock will rise materially. Therefore, I believe I will be able to roll my puts at much cheaper cost of leverage. I don't believe paying 10% per year to be absurd if the stock is going to remain at $14 for all 5 years. But that's just the thing, I don't believe that. Rather, I believe it will appreciate by an outsized amount. It doesn't mean that Black Scholes is wrong, because it's just using the current stock as input. But if the current stock price is wrong, then you know the saying... "garbage in, garbage out". Eric , do you mind explaining what you mean by "roll my puts". Do you mean you are buying puts or selling puts? Thanks I mean, for example, selling my 2015s and replacing them with 2016s. I am "rolling them" to a later expiration date, rather than letting them expire. Today, my $12 strike puts are 2015 expiration. It would cost me an incremental 65 cents to roll them from 2015 to 2016. I sell the 2015s for 70 cents "bid" and replace them with 2016s for $1.35 "ask". So that's an incremental 65 cents, which is currently the bid/ask cost of rolling them out by 12 months.

Since this thread began in March, when the common was at $12 and "A" warrants were at $5.60: "A" warrants are up 2.5% (closed today at $5.74) Common is up 16% (closed today at $13.93) That's brutal.

I don't expect them to return 15%, I like to trade them like SD mentioned and I own some from the block I bought at 340s. PW's letter to shareholders from March 2013: Float is essentially the sum of loss reserves, including loss adjustment expense reserves, and unearned premium reserves, less accounts receivable, reinsurance recoverables and deferred premium acquisition costs. As the table shows, the average float from our operating companies increased 5.2% in 2012, at no cost (in fact a small benefit!). That increase is mainly due to internal growth. Our long term goal is to increase the float at no cost, by achieving combined ratios consistently at or below 100%. This, combined with our ability to invest the float well over the long term, is why we feel we can achieve our long term objective of compounding book value per share by 15% per annum over the long term. Emphasis on over the long term. Over the "short" term, they won't because of the equities hedge and these low bond yields don't contribute enough. The best way to ensure that 15% will be attained over your holding period is to wait to buy until the drop the hedges, and wait to sell until they put them back on. Well... still no guarantees, but I suggest the odds are higher than if you also choose to hold during the period when they are hedged.

Did you guys think that 15% book value growth would happen when 100% hedged? Was it a secret or something that they were hedged? So here we are, deep in the red from the hedges, and you didn't get your 15% -- who's fault?

The City of Toronto could purchase BBRY and change it's name to MarionBerry in an effort to take the headlines away from their crack smoking mayor: http://online.wsj.com/news/articles/SB10001424052702303661404579179822063873580?mod=WSJ_hps_LEFTTopStories

Not sure why FFH is being compared to Canadian GDP. Just take for example the total size of their US operations (Odyssey Re, Crum, etc...) and their Asian operations, investments elsewhere, etc... Maybe compare them to global GDP, but Canadian? They practically have nothing to do with Canada -- Northbridge is not that big a piece of their pie.

I want to US to give up it's freedom and go back under the rule of the UK. They approved a 20% corporate tax rate. These banks like WFC and BAC that earn most of their profits in the US will be paying in excess of 30% rates. That's 50+% more tax! If they hit the 35% ceiling it's 75% more. So perhaps there is additional room for ROE boost at some point, although it feels like waiting for Santa Claus. Does it make sense that the banks could take on more risk (wider credit availability) if they were able to keep more of the profit? Clearly you would make more loans at a 0% rate than at 100% rate -- there must be some impact between 35% and 20%.

WFC's historical NIM was up in the high 4% (2006) or 5% range (1990s), not today's 3.5%. Here is a quote from their 2006 annual report: "Our net interest margin was 4.83% for 2006 and 4.86% for 2005." And that wasn't their best year -- they had NIM in excess of 5% in the late 1990s. In 1996 it was 5.87% and 5.86% in 1997 -- that's nearly 6% NIM! It shows it on that spreadsheet you attached. So they too are getting squashed and will make a lot more money down the road.

Something we knew ahead of time, years ago, is that Buffett likes the 1 foot hurdles, sticking to predicting the relatively most predictable. And Watsa likes them too but will also chase after the turnarounds that are higher hurdles, knowing that some will blow up but the rest will carry the average above the goal line.

All one has to do is look at all the 100% cash deals that were done the last few years by investors. Does anyone with 2 cents of brains in their head really believe these investors all wanted to be doing 100% cash deals? They wanted to buy all they could! But nobody would lend to them. Not at 25%LTV. Not at 50% LTV. Not at 75% LTV Not even at 5% LTV! Completely madness to believe there is no loan demand. exactly.. This is where the banks need to be brought to task. Explain to the Fed why they won't help encourage the economy by making sensible loans. I don't understand why they needed to turn me down. They could have offered me a 7% loan and I would have taken it. Even an 8% loan. After all, the difference between a 5% loan and an 8% loan is only 1.8%, not 3% (after I'm done paying taxes). But they wouldn't even offer that. There was no price at which I was worth the risk. QUESTION: Are they worried about getting sued if the rate is too high? Some sort of predatory lending liability? It seems they could make some really profitable loans here and there if they'd simply ask for more interest rate instead of turning us down flat.

My understanding of liquidity trap is that when rates are really low, you can't encourage borrowing any further because rates have already hit bottom. But this is different... I'm saying that lending is discouraged because there is no longer a safety net for the banks -- the Fed can't lower their funding costs any further, so there will be no NIM help when the next recession hits. So they have to tighten their underwriting to prepare for the next crisis.

So... what if jobs market improves, inflation ticks up and the Fed raises rates. The banks then respond by increasing the availability of credit during this period of rising inflation? I saw an interview of Merideth Whitney where she pointed out that the banks have been underpricing risk for a long time. I wonder if that started to happen when the Fed would bail them out by cutting rates at the beginning of every economic weakness. The banks were trained to understand that NIM would expand at the very time that loan losses popped up. They felt like they had a safety net. When the Fed initially cut rates to zero, they were mad that consumer rates didn't come down enough -- however didn't they effectively reach a policy interest rate where there was no longer a safety net? Then they decided to buy enough bonds to bring rates down... but that doesn't bring back the safety net. It just makes banks worry about what will happen to their loan books when rates go back to normal (not manipulated) levels.

In short, today you can't afford as much risk since the Fed can't come to the NIM rescue again. Thus, you restrict lending.

So getting full circle on the thread now, I am wondering if low rates are a disincentive to lend to anyone but the lowest-risk borrowers. Forget NIM for a moment. Higher-cost deposit environment (7% consumer loan rates for higher risk loans): Let's say you lend at 7% to a bunch of people that are collectively a bit higher risk... then the economy collapses and Fed cuts rates. Now your funding costs are lower and your NIM suddenly widens while dealing with the losses from this relatively more risky mix of borrowers. Lowest-cost deposit environment (5% consumer loan rates for higher risk loansa): Let's say you lend at 5% to the same bunch of people that are collectively a bit higher risk... then the economy collapses and Fed's hands are tied... they can't cut rates any lower. Now you suffer the same losses as before but your NIM can't widen because your funding cost is already at all-time lows. So in summary, when funding costs are at all time lows you need to starve the economy to some degree out of self-preservation. This is common sense.

All one has to do is look at all the 100% cash deals that were done the last few years by investors. Does anyone with 2 cents of brains in their head really believe these investors all wanted to be doing 100% cash deals? They wanted to buy all they could! But nobody would lend to them. Not at 25%LTV. Not at 50% LTV. Not at 75% LTV Not even at 5% LTV! Completely madness to believe there is no loan demand.