ERICOPOLY

I bought some MSFT 2013 $15 strike calls a moment ago for $10.63 and $10.65. Funny thing is, stock is trading at $25.60. So I paid a 3 cent to 5 cent premium for the advantage of borrowing $15 for 21 months. It seems like a good value.

What about the First Fleet, Mate? Didn't the Rum Corp get rich off free labor? Sure enough, however the Australian citizen did not outright own people as George Washington and Thomas Jefferson did. There was a policy of white-only immigration... and that's pretty embarrassing. But then you had segregation in the US. The Aboriginals were mistreated (Rabbit Proof Fence is a good movie on this) -- however I think the better analogy here is to compare with the treatment of the Native Americans in the US.

I was at the Australian Reptile Park near Sydney in March. The have an exhibit there called "Spider World" where you can go in and look at all these different venomous spiders. They actually extract the venom there and it's used to create anti-venom for saving lives: http://www.reptilepark.com.au/visitor-information/exhibits/spider-world/ Visitors are initially drawn into Spider World by the seriously cute rap-dancing spider-rapper 'Syd' (short for Sydney Funnel-web Spider). Upon activating a sensor outside the Spider World entry, Syd goes into welcome mode - rappin' and shakin' to a funky beat: "Welcome to my parlour. won't you come a little farther?. Yeah, my name is Sydney, that's Syd to cut it short..." So as you walk into the exhibit, there giant black spider is really there dancing and rapping with a boom box. He's dressed up like Run D.M.C., high top sneaker and all. I met a man at the picnic tables who is Australian and who spent a few years working in Los Angeles. I explained to him how something like that would be enough to have the park practically closed down in the United States. He realized what I meant once I spelled it out, but up until then it had just not occurred to him. In other words, they don't have things like that to be nasty, they just are a little oblivious. The gift shop of the Featherdale Wildlife Park in Blacktown (near Sydney) has "gollywogs" -- a doll for girls. The doll is jet black with giant red lips. Yet another example of what would get you shut down in the US. Or there's the Chinese restaurants with "ORIENTAL FOOD" is giant lettering across the front. But hey, Australia has never had slaves.

Strange that Apple is 12x forward earnings despite it's huge popularity. I don't think their growth is dead quite yet.

They were fairly inexpensive. I believe the 2008 $100 strike was about $10 when the stock was at $92 on June 23rd -- or maybe it was $10 when stock was $100. It's been a long time. I don't remember what the $90 went for. On that day 2008 $140 strike was $2.05. That morning was the bottom. During that trading day Fairfax put out a "no new corporate developments" news announcement and it seemed to sooth the market a bit.

Even CSCO trades at 8.3x forward earnings. (if you back out the $4.50 per share net cash).

His opinion doesn't get much respect these days. How many agree with him that the housing market will turn by year end?

I find the intelligence research interesting. A million dollar house in a suburb of million dollars houses -- except this one has a lot of security and very high walls. So far that's not terribly unusual for a rich person to have security walls. But the home had no phone service and no internet service!

The guy who took that shot has some serious bragging rights.

A mansion in Islamabad.

The IV of the insurance industry just went up.

They seem to do better than 15% just investing in equities without taking on any insurance risk. Perhaps not after taxes. Just an observation. I'd better duck the rotting food now.

I suppose compared to the size of the entire country, Jackson Hole is relatively small, but I remember reading a lot of the Jackson hole properties are owned by wealthy retired Californians who spend 6 months +1 day outside of California and claim Wyoming as their residence. So, no California income tax to pay in that case. Clearly, they like Jackson Hole but the motivation for such a long stay is taxes, as they don't want to leave their California roots either.

Yes, any time you feel like it you exercise them. Just call the broker and tell them to do it. The price tag of the options gets added to the cost basis of the shares, deferring your capital gains until you sell the shares.

The valuation of MSFT is comical when expressed in these terms: http://online.wsj.com/article/SB10001424052748703655404576293303706505770.html After Friday's selloff, Microsoft is trading at 7.1 times expected fiscal 2012 earnings, excluding cash. That isn't a whole lot better than Research In Motion, which after dropping Friday on lowered expectations, is trading at the equivalent multiple of 6.4. And it doesn't make much sense. Microsoft is a much more diversified company than the BlackBerry maker. Even as Windows' profit growth has flattened, Microsoft Office continues to power ahead. With revenue rising 21% in the quarter, Office contributed 55% of operating income. That it sells on Macs, and Office products are available in some way on some tablets, insulates Office somewhat from what happens in the PC market. Microsoft's server business, meanwhile, has emerged as a significant contributor to profits. And with the success of the Xbox Kinect product, the entertainment and devices division is even showing increasing profits albeit at much lower margins than the software businesses. Microsoft's partnership with Nokia means Windows Phone will gain significant market share, although the revenue potential remains uncertain.

Sorry to quote myself. But lets say the offer is only $1 for every $2 of goodwill. Should the still take the deal? Of course! Or how about only $1 for every $5 of goodwill. Should they still take the deal? Of course! Even at $1 of cash for every $100 of goodwill. Does it still make good economic sense to make the deal? Of course! So that's why it's worth practically nothing -- compared to the other components of book value, such as CASH!!! Sorry to continue, but I see the goodwill as the price to be paid in order to take over the (remaining) insurance operations, which include (minority interests in) insurance contracts, organisation, management, claims reserve, float, brand, customers, etc. If you sell the goodwill, then logically you have to also to include in the sale, the (tangible) assets that were part of the float the loss reserves the organisation, customers, management etc. that were bought for this goodwill. In other words, you will sell a future income stream if you sell this goodwill. And I, for one, would be very happy to buy what effectively is 25% of ORH's future income stream at US$ 1 ;D You may even argue that the goodwill part should in reality be "more valuable" than the tangible assets. Example: which is best ? buy tangible assets for $100, which yields maybe $6 a year buy a minority interest in an insurer for $100, which may be composed of $50 goodwill, $250 tangible assets and $200 loss reservs and debt earning $15 a year apparantly, the goodwill part of $50 was in reality earning $9 a year in the example (the earnings over the non-levered tangible asset) and compunding very rapidly. Or rephrased, would you sell for $50 (or 50 cents), an earnings stream of $9 a year, compounding at 20%? Or in other words, is the goodwill worthless? In my mind - of course not, in fact there should be a lot more goodwill than what appears from the books, and it is compounding at a very nice clip ;) Cheers! Nope, only the goodwill is for sale. Martians have landed in Toronto and have taken over the head office. They decide they could boost Fairfax's earnings power by selling off some assets that aren't performing well. The goodwill doesn't seem to be throwing off any cash so they figure it's #1 on the chopping block. Maybe it's like this: perhaps I want to mark the goodwill asset to market. Look, they could pay "fair" arms length value for a common stock on the market, but when it falls in price they're not allowed to keep it at that value. Goodwill is similar to marking those assets to model. You buy a portion of a company and your balance sheet goes up and down with the market value of that stock. You buy the whole company and it no longer fluctuates. Useful! Marking the stocks to market also tells you pretty much nothing about their future earning power, yet it's commonly done and nobody questions the practice.

Perhaps here is an easier way to look at it. The $55 strike 2013 JNJ calls presently trade at $11.55. Break even cost basis at expiration is $66.55, which is only 85 cents higher than present market price. But in a panic like 2009 where it gets down to $54 again and volatility is once again 20% of at-the-money price, then the calls are likely to be worth about $11 still. Maybe $10. So in a mega-crisis, you lose a whopping 3% of today's market price for JNJ, but in the event of getting no crisis and stock goes up peacefully, you only paid 85 cents in volatility premium.

If there is such a place where they keep a history of prices, I don't know about it. Anyhow, if we get another crisis like that I likely won't get JNJ. There will be things down 80% again. The JNJ calls are largely my idea of getting a phenomenal deal in 2013. We can get the big crash this summer, I keep the JNJ calls, I use my cash instead to buy LUK at $10. Then LUK recovers by 2013 and I look forward to JNJ at 11x P/E. Lots of variability here -- lots of optionality (hey, that's why they are called options). But I don't just want to sit around waiting for the crash... and I don't want to stay invested in smaller companies with low margin of safety and wind up down 60% in another 2009 crash. -- I want to confidently know that I've got an amazing set of deals lined up on my calendar -- January 2013 to be precise. And by amazing I mean the kind of bragging rights I'll have fun telling my son about when he is 25 and JNJ is at 20x. Son, back in my day you couldn't avoid tripping over companies like JNJ at 11x earnings.

People seem to panic and clamor for puts -- maybe it's overeager speculative shorts. I don't have an answer as to who drive up the prices.. That drives up the price of calls too (put/call parity). There are some exceptions for HEAVILY shorted stocks (like SHLD in 2009), but generally speaking a stock like JNJ will have put/call parity. Or maybe it's not panic itself that drives the price up -- maybe it's lack of liquidity (less capital to support the options market leads to less eager options writers). I don't really know, but I know that volatility premiums explode in a crisis, and I know the put/call parity is reality in the shares of companies that aren't the most hated on the street. Some funny stuff happened during those times... when KMX was on the way down... maybe around $15 or so I wrote a $12.50 naked put for about $2.50 (thinking I'd make 25% return on the $10 at risk). Pretty soon the stock was down around $7. Does this mean I would lose money? Well, surprisingly not yet... Because the puts were now fairly deep in the money, I could by them back without much premium. I think I bought them back for about $6 or so (don't really remember). So I was down about $3.50, so far losing about 35% of the $10 that I'd put at risk. Don't worry though, I come out alright! At that time LUK was trading around $17 but the $15 put was selling for $5. So I wrote that put. Now, $5 is a 50% return on the $10 that I'm putting at risk. So now I'm down 35% on KMX but I'm going to make it back almost whole getting 50% return on LUK puts. Well, after LUK drops to $10 I buy those puts back at $6 (lost additional 10% on LUK), and turn around and write $10 strike RWT puts for $5 (stock was at about $12 at the time). Now, I'm going to make my money back and make a profit to boot! And I did -- the RWT puts made me 100% return ($5 premium over the $5 put a risk) -- the stock never traded below $12 if I remember correctly. I spread it around a bit more than RWT, but I'm just using RWT only in the example to simplify. This is something people don't really fully realize about writing far out of the money naked puts... if you get caught in a crash of that magnitude, you can bail water and right the boat with this kind of trading strategy. Yes, time matters. But 21 month options decay very slowly at first and then accelerate. They won't decay by 1/21 in the first month. The time value will decay mostly at first, then the volatility will sort of remain valuable up until a few months before expiration. You'll note that options expiring in a month are not 1/21 as costly as the ones expiring in 2013. I am using 21 months in my example because really that's what these options are -- expiry was just 2 days ago for the April options. (Feb, Mar, Apr) -- 21 months. I can live with a few dollars a share decay in the calls. Primarily, worst comes to worst I will be taking delivery in 2013 of JNJ at forward 11x earnings. So fry me in hot oil!!! And if the stock is $54 at the time, I'll be getting 10x forward earnings instead of 9x (if I had never bought the calls today). Man, what a tough life.

Options are cheap when people are not fearful, and expensive when they panic. When KO was $40 the 20 month calls cost $8 at-the-money. But at the same time the $30 strike KO put was $3. So people would pay 10% premium for an option 25% out of the money. A repeat crisis would put the $60 strike JNJ call at about $6 or maybe more if stock dropped to $53, and the $50 strike call would probably be about $12.

Median income in Australia is over $70,000. And their dollar is stronger! Imagine how cheap some of our stocks look to them... look, Kraft makes their Vegemite! It's not like they've never hear of our global brands. Why should foreign investors not be interested in buying up US multinationals? 10 years ago AUD was at $0.52. Now it's $1.08. So like... because only 25% of KO revenue is in the US, then when will the world wake up.

It's not so much that I believe it's low probability (although I do), it's that I can shrug it off safely with this strategy.

VIX is at 46 month low.

I've been having the same thought and considering switching. That's why I initially starting talking about the 10% downpayment, because I was already evaluating making the switch to the higher down payment $60 calls that have less volatility premium cost. I don't know much about options. I could NOT accurately answer things like "what is a verical spread", or "bull spread", or all the other crap jargon. I just use these things like an engineers uses components... you either build with them when they make sense or you don't. They're just tools.

A person without ethics would not understand where the line is drawn. So that's really not the kind of argument he wants to be making, in terms of salvaging reputation.