ERICOPOLY

The top tax rate on dividends is more than 35% in California. The tax on dividends comes on top of the dilution. The tax cost would be much larger than the dilution cost.

I haven't decided, and I might sell volatility on something other than BAC.

Once I saw BAC plunge after the earnings I sold the FFH in my RothIRA. So the RothIRA is actually 100% in cash right now. So I have flexibility.

Is that b/c you hope to take off the hedge and buy some BAC common/Leaps eventually? I hope so.

I hate to say it but I'm rooting for the stock to keep dropping. It's nice to be 100% hedged.

I believe they also are a safer bank due to the heavy reliance on fee income as a high percentage of total income. Should they ever find themselves in an especially nasty recession where loan loss reserve building is depleting capital, they can rebuild that capital quickly without dilution because the fee income accounts for 1/2 of their total income, and the fee income keeps rolling in during recessions without any associated rising reserve costs (there's no reserving associated with fee income to state the obvious). Being able to quickly dig their way out of trouble -- that makes it far less risky. Heavy reliance on fee income is key because it's this extra stream income that doesn't come with the headache of loan loss reserving when things go bad. The fees keep rolling in. Now, were you to take away their fee income and force them to make their numbers strictly from net interest margin, the level of risk would be substantially higher.

Two years ago I had surgery on April 4th. Didn't walk again for a couple of months. Last year we were in California house hunting April 1-15th. This year I turned 40 on April 10th (day of the meeting) Perhaps the right time will come along.

Gary actually came to our dinner with Prem this year. Cheers! Too bad I didn't go because he didn't reply to the email I sent him. I got an auto-reply offering a subscription to his newsletter. I wanted to ask him why he expects a reversion to the mean of home ownership rates when the population demographics are changing. The homeownership rate for people in the highest bracket is 80+%. And in all the brackets below age 55, the rates of homeownership are actually below the mean. So you can see where this is headed if there is mean reversion -> higher ownership rates. It's like he's arguing that the population is older today than it was 5 years ago, so mean reversion would suggest that boomers are going to start getting younger to normalize things. Maybe Shilling is going to be younger next year? EDIT: If it wasn't clear, Shilling thinks home ownership rates are still too high and will fall back to "the mean" level.

Japan has had very low rates of unemployment the entire time.

I worried about that, funny as it may sound. However I've doubled my holdings of common in my taxable account lately after selling it from my RothIRA -- so the cost basis on those new shares is close to $12. There are a few strategies for what to do if BAC is down in November and the puts have not generated the needed loss: A) purchase calls in November in RothIRA. Sell the common a month later for a loss (December 2013). Then book the gain on the puts in 2014, dump the calls, and repeat the strategy in taxable account hoping for the new round of puts to look relatively worthless in late 2014. B) Sell the FFH at a loss in Dec 2013, buy something else that is truly beaten all to hell. I need FFH to be down to about $300 per share for this to be fully effective. So I might have to combine it with scenario A. C) Sell 1/2 of the BAC for tax loss and buy something else, hedge that other thing with new puts and have those puts be worthless in late 2014 so as to offset the gains from the BAC puts that would be taken in early 2014 So I'm sort of hoping that we don't have to go there. I would rather just have my $12 strike BAC puts being nearly worthless in late 2013.

Because I want Obama to get ZERO of my money. Now I'm pissed and the gloves are off. As soon as the 2016 puts are out I'm going to stock up on them. Then I'm going to wait a month and sell all of my 2014 puts for a big short term capital gains loss before the end of the year. Thus, no taxes due next April for 2013 ;D ;D ;D

I bought $100 strike IWM puts for the same reason. Mine is a 20% hedge versus your 25%. I like the Russell 2000 index more because it drops harder during crashes. Seems like the average company there is more fragile versus the mega-caps that dominate the S&P500.

Easy -- I am getting taxed at about 52% on the sale of my warrants. So effectively, the puts are on sale for half off. And what if BAC keeps rising to $15? So the decision to go to cash is not so simple. Good point about the taxes. My situation is different than yours. I still have BAC common, also some MSFT and SD. I sold all my BAC calls when they spiked recently. I don't think it will act like a coiled spring as much as it did when it was below, say, $10. You are right about it not being a coiled spring anymore. I think BAC will earn (the earnings per share) more than those puts cost me. Then as the stock rises, it gets cheaper to roll those $12 puts along and thus the earnings easily overpower the cost of the puts. Then it trades at a multiple to book, more tailwind. This might take several years to play out. Meanwhile, I have FFH plodding along. Perhaps something exciting will happen. I like it. Not for everyone, but I like it. Could hold them both for the long term, picking up a few extra percent per year. Nice tax losses accumulating as well as those puts get rolled along. It seems funny to me that one of them is under tangible book and will be able to earn 13%-15% on tangible equity, and the other trades at only 3% premium to book. Both could see a 50% pop in how they are priced (not counting earnings) in let's say, 5 years time. Now that could be sweet! It's like I've created a 50 cent dollar from rubbing two 70 cent dollars together. In a sense. Not quite, but a little bit like that. Anyways, the downside seems not too bad given that the one unhedged is the one that itself is armed to the teeth with hedges.

It seems to me that the high debt issuances of the US Treasury would crowd out the private sector investment if there wasn't a new buyer stepping forward willing to snap up every new issue. That new buyer would be the Fed. So in a sense it keeps the available supply of risk-free debt issuance in balance with the risk assets already out there. That keeps prices from collapsing for risk assets. So QE is sort of the prevention of collapse due to excessive US Treasury issuance, rather than propping up assets that otherwise would collapse on their own (outside of US Treasury issuance). I can't think at the moment of how they unwind it though. I guess over time interest payments (and bond maturities) flowing from the Treasury to the Fed can be used to gradually reverse the Fed's money printing.

Maybe this is intentional. He wants to buy back $5B worth of BAC shares as cheaply as possible, before settling with MBI. That is quite risky. Buying back shares is intended to increase shareholder value, while running more legal risks is to decrease shareholder value. How could the move be such a calculated one that he is sure the eventual result is an increase in shareholder value? If BAC is ruled to pay $40 bn in article 77, then the shareholder value will take a big hit. You didn't get that $40 bn number from me I hope. I threw that number out there not to imply that an article 77 ruling itself would force them to pay up $40bn. Rather, if they lose successor liability as well as the article 77, then BAC management might have to increase the legal reserve for settling the present $8.5bn number at a higher level. So I pulled out a totally arbitrary massive number of $40bn -- and the amount was to quiet down your alarmist claim that they would be worthless, so I showed how even an incredibly large reserve boost would still leave them nowhere near a crisis. Why do you think BAC will go up to $20 in two years? It is already trading at the tangible common book value now. If it can go to the $20s, it means the ROE has to be 15%, which is quite difficult. The reasoning is that the Q4 results suggested that they are earning $1.60 per share before runoff expenses. At 10x earnings, that's $16. We expect the runoff expenses to be fully runoff in two years. So that gives you $16. Then you only need to come up with $4 more. Well, knock $1.30 off the price for the value of the tax asset, and you are at $18.70. Then we're down to only a $2.70 excess over $16. That could be achieved from earnings in 2013 and 2014 year and the next. Maybe the earnings come short a bit and it's $19.50 or so in two years. But $20 is a nice round number. However, there may be a nasty recession and there may be a nasty legal outcome. So those are the reasons why it might not get to $20 in two years. $16 is only 10x earnings multiple and 12% ROTE. They could easily be earning 13% ROTE per Moynihan's statements of the minimum range to expect from them in a couple of years. I see... I am a bit surprised that you will continue to hold the stock after it is already close to the book value. You mentioned that this is the only stock you hold, so you think this is the best opportunity then? I have other financials like AIG and AGO, other than my MBI position. They are all way below book value. What about European banks like SAN? It has only 16% operations in Spain and it has a strong US and South American market share. Do you think SAN is less attractive to own than BAC at current price? I profess to not know what the best stock is in the market, nor what the best opportunity is. To my detriment I'm sure! However I feel comfortable with 100% upside in BAC. It is 85% hedged at $12 strike and 15% hedged at $10 strike. My downside is about 87% in FFH. And I'm hedged 20% with IWM puts (Russell 2000). EDIT: Anyhow, I might add that discounts to book value don't matter as much as price you pay relative to earnings power. And of course, the staying power of those earnings over the long term.

Easy -- I am getting taxed at about 52% on the sale of my warrants. So effectively, the puts are on sale for half off. And what if BAC keeps rising to $15? So the decision to go to cash is not so simple.

I don't know what the phrase is when they are out-of-the-money like the $15s are. Maybe it's still "notional value" -- not sure. I picked up the term from reading the Fairfax annual reports. But just so you understand me, I bought the $100 strike IWM puts (Jan 2014 expiry). For every 10 contracts I bought, it hedges $90,110 notional value because the index closed at $90.11.

I hedged the BAC with $12 puts 2014 in my taxable. In my RothIRA, I bought the BAC $12 2014 calls. That freed up my buying power to head back into FFH. Worst case, FFH declines and I also lose the value of the BAC put. I'm willing to eat that additional loss because I believe in the end BAC will turn out really well -- I just may have to roll calls along for a while. I also today hedged 20% of notional with Russell 2000 puts. This leaves me with: 100% notional long BAC (85% hedged at $12 strike, and 15% hedged at $10 strike) 87% notional long FFH 20% notional short IWM (Russell 2000) I didn't do this as a reaction to the markets today. I did this after meeting another board member yesterday. I talked about what I was doing and went home firmly convinced that it was still too risky. So I planned to move the majority of the BAC puts to $12 and bought more FFH. Then I decided to add the Russell 2000 puts. I don't know, I just suddenly got extremely bearish. Normally, I'm the most optimistic. But I thought about how I'm usually the last to lose my nerve during bull markets, so I used that logic to convince myself that if I'm getting this nervous then it's time to do more than just worry about it.

I'm normally extremely optimistic and bullish. However I feel extremely cautious right now. I have now hedged 85% of my BAC exposure at $12 strike, 2014 expiry. The other 15% is hedged at $10 (2015). I have replaced the downside with FFH. I now have more FFH exposure (in terms of number of shares) than my peak exposure in 2006! Like most people, I feel FFH will also fall during a big crash (just like last time). However, I'm just too much of an optimist to not be invested. Cash burns a hole in my pocket.

Maybe this is intentional. He wants to buy back $5B worth of BAC shares as cheaply as possible, before settling with MBI. That is quite risky. Buying back shares is intended to increase shareholder value, while running more legal risks is to decrease shareholder value. How could the move be such a calculated one that he is sure the eventual result is an increase in shareholder value? If BAC is ruled to pay $40 bn in article 77, then the shareholder value will take a big hit. You didn't get that $40 bn number from me I hope. I threw that number out there not to imply that an article 77 ruling itself would force them to pay up $40bn. Rather, if they lose successor liability as well as the article 77, then BAC management might have to increase the legal reserve for settling the present $8.5bn number at a higher level. So I pulled out a totally arbitrary massive number of $40bn -- and the amount was to quiet down your alarmist claim that they would be worthless, so I showed how even an incredibly large reserve boost would still leave them nowhere near a crisis. Why do you think BAC will go up to $20 in two years? It is already trading at the tangible common book value now. If it can go to the $20s, it means the ROE has to be 15%, which is quite difficult. The reasoning is that the Q4 results suggested that they are earning $1.60 per share before runoff expenses. At 10x earnings, that's $16. We expect the runoff expenses to be fully runoff in two years. So that gives you $16. Then you only need to come up with $4 more. Well, knock $1.30 off the price for the value of the tax asset, and you are at $18.70. Then we're down to only a $2.70 excess over $16. That could be achieved from earnings in 2013 and 2014 year and the next. Maybe the earnings come short a bit and it's $19.50 or so in two years. But $20 is a nice round number. However, there may be a nasty recession and there may be a nasty legal outcome. So those are the reasons why it might not get to $20 in two years. $16 is only 10x earnings multiple and 12% ROTE. They could easily be earning 13% ROTE per Moynihan's statements of the minimum range to expect from them in a couple of years.

Yes. I was trying to model their returns so I had noted down this % way back in 2011 and here it goes: Equities/Shareholders Equity Year 40% 2002 47% 2003 59% 2004 76% 2005 77% 2006 62% 2007 77% 2008 64% 2009 47% 2010 Vinod Thanks Vinod. I knew somebody had it already organized.

Fairfax's common stock portfolio (as of last report) is almost exactly 50% of shareholder's equity. Have they ever taken this percentage meaningfully higher? Or have they ever indicated at what level they consider to be "maxed out"?

My firm got incorporated in 2004, and I started investing its fcf in 2006. :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes giofranchi, Does Italy have any rules similar to our Personal Holding Company tax on undistributed passive profits? In other words, can you just retain all profits within your corporation and invest them without ever yourself paying a dividend?

The best trade at the time was buying up the notes of the indebted US states that were trading at 30 cents on the dollar. They were paid off in full when Alexander Hamilton floated the US backed bonds. I read Alexander Hamilton by Ron Chernow -- I believe it was 30 cents on the dollar (working from memory). Great book if you haven't read it. I remember Abigail Adams wanted to invest in those notes, but her husband, John Adams, wouldn't have it because the were "Adamses" and they only invested in land. So you know who the brains of the family was.

Summary: He says the US will return to high rates of growth (unlike Grantham). But first, there will be 5 more years of consumer de-levering. On the whole that sounds very good -- we need that high growth to shrink the government debt relative to GDP. So, just a couple more years! Then another one, and then just a couple more! Sounds like we're almost there given that this whole thing began when the 2000 bubble burst nearly 12-13 years ago. We are almost (just two more years) 83% of the way through! ::) (in two years we will be 15 years through this out of 18 total years beginning in year 2000)