ERICOPOLY

What strike price do you own for the 2015's? Mostly the $7s but a few $10s.

This of course is good news for the 2015 call options. The kids may start to believe again if they here Santa's bell ringing strong by the end of 2014. Today they don't believe in Christmas.

Thought I heard "down to 400k by end of 2013". You hear that as well? Haven't done the CC yet -- just dealing with getting my kids to school first. Had time for the slide deck only so far. 400k by year end leaves only 100k to 150k of excess troublesome loans. I wonder how much extra staff they need on hand to deal with that load level?

A couple of months ago Moynihan mentioned that there's a lag of about 6 months before the expenses fully drop off after LAS is down to normal levels. I guess that's charges related to letting people go, waiting for their contracts to run off, etc... So if they get their staff substantially down to normal levels over the next two quarters, we can expect perhaps early in 2014 to get that $12b annual LAS expense down to just $2b. A savings of $10b. Or at least most of it. I don't expect the number of troublesome loans to keep coming down at the rate of 160k per quarter, but at just half that rate we're 100% done by year end. Even by mid-2014 it's just gravy -- we were waiting for mid-2015.

You see, 773k less 232k (selling the rights to service those loans) leaves them with only 541k troublesome loans left to service. Normalized level is only 250k - 300k of troublesome loans. So they now only have to get through 241k to 291k of excess troublesome loans! Just in Q4 alone, they hacked their way through 163k troublesome loans. They now have fewer than twice that many remaining, and their promise is to not be down to the normalized level for another 8 quarters! LAS expenses should do a cliff dive by year end. And here I was waiting for mid-2015... Underpromise and overdeliver.

I own the stock for it's future (not current) earnings, and on this front the quarter was stellar. I think it's their best quarter yet, no? 60+ days delinquent loans serviced declined by 163K, or 17% from 3Q12 Declines in 60+ days delinquent loan trends expected to continue including announced MSR sales (232K) 60+ days delinquent first mortgages in servicing portfolio (# of loans in thousands)773 Total LAS staffing decreased 9K from 3Q12 driven by 6K contractor and offshore reductions as declines in delinquent loans allow for reduced workforce

Psychopaths :) http://socialize.morningstar.com/NewSocialize/forums/p/155516/155516.aspx#155516 And anything that blocks the emotional response to investment results-positive or negative--is a good thing; there is nothing so destructive to returns as "human nature." I've always believed that the best investors are somewhat psychopathic and antisocial, for much the same reason; a belief that everone else is wrong but you is an excellent antidote to herd behavior. - William Bernstein Eric, If the above is true, you must be a pretty scary guy to be around :) Vinod I scored low on the psychopath test that people passed around. I agree with the comment about common sense. Let's go back a year. We had BAC at $5 and you could go 100% into it with very little downside (you could write puts on other things and use the proceeds to buy calls in BAC). So you could have 100% concentrated upside with a diversified downside. That's how I initially structured it when I was scared. Later as I gained confidence I bought the puts back in and levered it -- this happened as my confidence increased (helped by a rising stock price). The argument that it could go to zero because of it's black box nature was basically no reason to stay away from it... just a reason perhaps to swap the downside for that of others. Anyway, it was common sense.

So after being a psych major, then an accounting major, then a flight student, I became a math major (I have a BS degree in Math that in total took six years to earn). Remember Al, I'm the guy that sat next to Danica McKellar (Winnie Cooper) in Linear Algebra at UCLA. I linked that picture to her from Stuff magazine and you really liked it.

What's up with the near put/call parity these days? I was getting used to there always being call premiums at 1/2 the cost of put premiums (giving you 2x upside for your 1x downside). What changed in the calculus to bring this back into line? Did the short sellers find shares to borrow or something?

I just posed the question because I've heard some people say that lawyers and doctors make poor investors, then engineers, so I'm wondering who makes good investors. I think even investors make poor investors (if you look at the relatively few who actually outperform the index). I actually agree that engineers make poor investors. I worked with tons of them at Microsoft, and they either liked the idea of using statistics and modeling of charts and patterns, or they believed they had an edge and wanted to invest in technology companies. I think the large swath of them suffered from various degrees of Aspergers and unfortunately weren't indoctrinated first in a better model -- like a valuation model of buying low and selling high relative to a fundamental business value (in other words, value investing). It's like turning the titanic, whereas I think with other types of brains it can be easier to introduce a new concept. Sort of like a baby goose gets imprinted and later can't be convinced otherwise.

Which discipline makes great investors? (question posed at those who say engineers don't)

I never took you for a Mafioso ;) You don't like blood on your hands, so your hired gun (FFH) invests in such banks (WFC -- a non-owner operator bank) on your behalf. You have no direct knowledge of any such crimes.

What happens with put contracts after the deal goes through? Looks like 3% (for example) can be made at the bid on the $7 strike 2015. Does the contract evaporate the moment the company goes private?

Things may change of course, but what's holding him back so far? He's controlled SHLD through a period of incredibly cheap stock prices, and the only thing he has done is returned cash to shareholders.

Now I've got the guy who pulled out the stock price of Y over 10 years (instead of the BV growth) lecturing me on forward looking results :o Prem's stated goal is 15% annualized. Buffett's is a couple of percentage points above the S&P500, measured over long stretches of time. And Buffett's goal is pretty darn close to what Alleghany aspires to. How about, risk adjusted, which is the more impressive result even if they turn out to be exactly the same? I just don't see the allure of Y with the other option available.

Okay, I think you are saying it would have hurt the Y stock price. How about if we go farther back in time then to take the sting out of the Berkshire valuation compression. Going back 20 years the stock price of Y has delivered a shade under 10% annualized. Is that phenomenal?

Yes, however price performance of Y wasn't what I was referring to. I was referring to whether management is beating themselves up for nothing when instead they could play golf. The Alleghany management could have wound up it's operations ten years ago and instead put all of it's equity into Berkshire stock. BV at Alleghany would have compounded at 8% annualized (Berkshire's stock price performance). This despite the contraction of P/BV for Berkshire over the same period. The "look through" performance of Alleghany would be far superior of course -- not only because the "look through" BV would have grown at 10%, but because IV grew even more. This was even during a period when Berkshire's equities did relatively poorly (high valuations for the big blue chips). This isn't to say that Y can't do better, but if their goal is 7% to 10% and they merely achieve that, I'll reassert that they are wasting their efforts.

Berkshire looks to have done a bit better than 10% annualized growth in BV (and more in IV), versus the 7.8% growth in BV for Alleghany. Unless there was a special dividend that I'm missing, Berkshire smoked 'em.

I'm surprised at that, I thought BRK had done better than Y over that period. Alleghany reports: For the ten years ended December 31, 2011, Alleghany’s common stockholders’ equity per share increased at a compound annual rate of 7.8%, There is something else to consider: Berkshire's IV has grown faster than BV in past 10 years. The result of the large operating company weightings at Berkshire.

I guess this would be considered a big risk by some people. Anyway, they are very good equity investors if your benchmark is the S&P 500, not if your benchmark is Ericopoly ;) Why would an equity investor determine that Y is a better risk than Berkshire for the same expected returns? A "Baby Berkshire" ought to deliver substantially better rewards, otherwise... why not just own Berkshire? That's how I think anyhow.

I haven't sold any BAC. I added some MBI common and AIG calls. Did you lighten up on the warrants or calls? For what it's worth, you're my hero. 8) The only tweaking I've done was to get out of the 2014 BAC calls in my Roth IRA and reinvest in the 2015 BAC calls. I lost a bit of leverage there due to the higher premiums on the 2015 calls. I still have all of the warrants and all of the common.

I haven't sold any BAC. I added some MBI common and AIG calls.

Peckyno -- must be difficult to introduce himself to latina women. "Excuse me, did you say you are pequeno?"

7-10%? Why do they even go into work every day? Why not just shut down the operations and put the equity in Berkshire stock?

Yup. And that net interest margin is probably the lowest it will ever get. Mr. Market gets confused at times! Cheers! Actually, going back yet another year to Jan 14th, 2010 gets us to $16.82. The most important thing to know, however, is that the stock is overheated because it recently gained 100%.