ERICOPOLY

Could be 5-7. I'm not clear as to why yet though. We're coming up on 2015... if there are no more financial-crisis lawsuits filed by 2018 it will all be in the past sheltered by the maximum 10 yr statute of limitations. So that's in 3 years. And with each year ticking by, a year's worth of liability slips into oblivion. For example, we're no longer liable for things done in 2004 and prior. Next year 2005, then 2006, then 2007. That's my thinking. It looks like they're already settled anyhow, but I still feel like they'll find a new way to sue. I did not know about the 10 yr statute of limitations. But lawsuits aside, even when banks report more normal earnings, I presume the scars from the financial crisis would dilute the low leverage factor on the multiple that investors assign to bank stocks. Vinod It is FIRREA that carries 10 yr statute. Triple damages. It's a really ugly thing to tangle with. What you say about the scars from the financial crisis makes sense to me, except... look at how badly the small cap index got whacked in 2008/2009, and now look at it today? These people have short memories. Leading me to believe that their issue with banks has to be either litigation or related to ever-increasing capital demands by regulators.

Could be 5-7. I'm not clear as to why yet though. We're coming up on 2015... if there are no more financial-crisis lawsuits filed by 2018 it will all be in the past sheltered by the maximum 10 yr statute of limitations. So that's in 3 years. And with each year ticking by, a year's worth of liability slips into oblivion. For example, we're no longer liable for things done in 2004 and prior. Next year 2005, then 2006, then 2007. That's my thinking. It looks like they're already settled anyhow, but I still feel like they'll find a new way to sue.

Ironically, when I actually talked about the warrants on this thread people squealed. So we then had to create that "BAC leverage" thread over under the "Strategies" category where we could then discuss warrants. Because one wouldn't want to discuss warrants under a thread titled BAC-WT ::)

However, if you look at risk-adjusted returns... the TBTF banks ought to trade at higher multiples today vs before the crisis. The multiple paid for $1 of earnings from a very highly-levered company should be lower than the multiple paid for $1 of earnings from that very same company after going through a process of cutting leverage in half. That doesn't meant it should trade as high as the market, but it should be more richly valued than prior to the restructuring. The invisible hand that drives this process is the collective pool of investors who will see these as low-risk financial utilities that generate market-beating returns with ease (all those mutual fund managers who need to "beat the market"). The less risk in the strategy, the more attractive. This would tend to drive them to "overweight" the sector until the difference in earnings yields becomes too tight to be worth bothering with. However, the approach will not be attractive as long as legal settlements threaten to destroy an entire year of earnings (like for BAC this past year). Personally though, I think we're past those legal threats.

Modesty is a nice quality. But you've been playing the game for 10+ years getting Michael Jordan level stats. Not exactly comparable to a single lucky shot :) I need an Asha Bhosle in the background if I'm to keep on the hit parade. The board stopped giving away ideas on a silver platter. I'm like the Milli Vanilli of investment talent.

I believe I was reflecting on what I'd seen over the prior few years. It seemed crazy to be spending $3 on an at-the-money WFC call option when the stock was trading at $10. It felt like that $3 decaying would just eat too far into the gains. However once the crisis let up a bit, the stock was soon trading at $20 and you could write a $25 strike call for $3. So even though the implied volatility had dropped a whole lot after stock price recovery, the price being so much higher meant you could still grab back that $3 that one presumed would be lost to decay. The same pattern emerged with BAC. It was $2 for the at-the-money LEAP when the stock was at $5, but it was also $2 once again for the $10 strike when the stock passed $8.50 a few months later on the road towards $10. The risk is still there that the rally will never happen... but this kind of approach reduces the decay risk if you are going into expensive at-the-money options during times of extreme fear (high volatility). There tend to be violent rallies. Perhaps this is why the options are priced so high during times of distress -- the buyers know that if things turn the right way the stock prices will be substantially higher and thus writing covered calls down the road will be a way to mitigate the extremely high prices paid for the initial set of calls. Of course, you then have to wait for the written calls to mature, and by that time the stock may have sagged again. Another opportunity to buy more at-the-money calls and repeat the cycle. This is not meant to be an endorsement or a suggesting that it will always work out better than continuing to hold or just outright selling of the initial set of options. It was merely me thinking out loud about how I've noticed that during every bout of extreme fear, the options in absolute dollar terms were not much different during the crisis than after the rally. Or if you instead exercised the $5 BAC calls that you paid $2 for, you could have just continued to hold those common shares while buying new $5 strike puts. And thus (in perfect hindsight) you never in the end really paid that much for the leverage because the $5 puts were cheap in 2014. Today, you can roll those $5 puts again out to 2017. By then, the stock may be over $20 and it will get very very easy to recover that initial $2 that you spent on your first at-the-money BAC options in late 2011. You would recover that initial $2 by selling covered calls (with stock then over $20) -- probably the $25 strike would be over $2.

I miss all the posts about gold. Today, GLD is lower than it was 5 years ago! I suppose that explains why it's out of favor.

Even if it's long term gains ? Corporations don't get a different treatment of "short" vs "long" term gains.

Another bonus... He can now sweep all the dividends he wants from Duracell tax-free. Instead of continuing to pay tax on PG's dividend.

A. Gary Shilling believes that in 4 years we'll be back to our normal long-term rate of GDP growth. He is aware of all the issues you've raised. So even though they sound convincing, there are other things to think about as well that are also important. For one thing, I doubt the debt has to be repaid as you suggest (one form of repayment is to issue more debt as the old bonds mature). You just need to grow it slower than GDP and you're golden long-term. So you can run deficits in perpetuity and yet still be deleveraging at the same time. There was also a boatload of malinvestment over those 19 years. Did that contribute to the slow growth (and relatively poor market returns) that we've seen? I imagine it didn't help. Could the next 19 years not have this drag?

So he gets to swap his PG shares for Duracell. No capital gains tax due on the PG shares. I have an idea... Could Bank of America purchase some Berkshire Hathaway shares and then swap them with me for my appreciated BAC shares? That way I could get out of my BAC shares without a capital gains event. That would be an awesome way to have a shareholder friendly buyback program. You just notify the company that you want to tender your shares, and specify which shares they should purchase and deliver to your account in exchange.

That chart indicates that since roughly the end of 1995 (nineteen years ago) the market has gone up by... 3.4x A mind-blowing 6.7% annualized. So with dividends included, less than 8.5% annualized total return (the dividend yield today is higher than it was back then). But during the 20th century the market returned 10.4% a year. So, it's been a period of sub-par returns, tractor beams or not.

They had a cool half-time gimmick at the UCLA basketball games where a college kid was able to try to sink a half-court shot for a semester of free tuition. Eventually, somebody makes that shot and gets the tuition. He isn't ready to play on the team though.

Due to the leverage involved, the annualized loss on your equity invested (which is what you are computing) will be higher than the annualized cost of the synthetic loan (which is what I am computing) that is embedded within the warrant. You could create a new warrant with a higher strike and it would have even more embedded leverage. Using your method, the resulting figure will be greater still (because you are assessing the leveraged impact on your invested equity).

Eric, how did you get to 5% cost? Al said the strike is $42.40. So that's what you are implicitly borrowing. $1.54 is 3.6% of that. Then $1.90 warrant premium. $42.40-$1.90=$40.50. $40.50 grows to $42.40 in roughly 4 years at approximately 1.1% annually. So that's 4.7% total -- close enough to 5%.

So it seems. 60.50 - 42.40 = 18.10 Trading at $20 - market is charging $2.00 for 4 years of time value. Thanks for pointing this out. Silently, the market charges you an additional $1.54 per year of missed dividends. I think it winds up costing something like 5% a year for the leverage.

Therefore, Mr. Market gets a pass for not recognizing their forthcoming unusual capital gains. Long term shareholders will get paid either way.

Current interest rates are night and day from when Fairfax began operations. They not only had the higher yields, they also got a tailwind from capital gains as rates fell. We might very well wind up with low yields and capital losses as rates rise. 3x leverage on bonds returning 2% is only 6%. Hmm...

It would be nice if the culture at all of the big banks could be honest for a change. It begs the following question: Would any of these banks make any money at all if they were honest? What do you mean by "honest"? If you mean telling the truth, then no. In fairness, sometimes it's just a little white lie. "Yeah, that deal would work really well for you" is the same as "sure, honey, I'd love it if your parents could join us tonight". I'm happy to do my part for the deficit.

What is the subject "doubled my capital for first time" mean? you went from 25,000 to 2millions, that's many times of doubling... what am I not understanding? I first thought he meant that yesterday he doubled his money in one day -- a first for him. In that case he's got me beat because my record is two days.

From where interest rates are today, and with the hedges, my point has been that needing "only" 7% on the portfolio is a tall order. Now, if underwriting kicks in (as it did last quarter) it changes the calculus. 15% isn't my goal though. I will be happy to make 10% a year from this investment. I think 10% will be easy if underwriting stays like this.

I find this a bit surprising. You've been fairly critical of FFH and of insurers (leveraged bond portfolios) in the recent past. Was this you trying to kill your thesis and still finding it an acceptable investment despite the flaws that you highlighted, or did your thinking on their prospects change in recent months? I don't think I've been negative on them. It wasn't negative when I said they were trading at 1.3x book after stripping out goodwill when others were claiming it to be 1.05x. I pointed out that they were merely trading at the private-party, arms-length valuation that they themselves have paid recently for their own component parts. I commented that it should always trade at a discount to IV if they are truly value investors -- I still hold that view. Mostly what got me to buy was the feeling that if the underwriting results keep coming in at these levels, it will result in higher valuation (the underwriting profits being capitalized and reflected in the stock price). I could have made that decision last quarter, but as thing go I made the decision this quarter.

I am a psychic. I was really bored as a phone operator, so I left that gig and started investing my retained earnings in stocks that I know will trade higher within a couple of hours.

This is just the next iteration of buying it with the intention of holding it forever. 3,000 shares is 1/8 of what my position was in June-Nov 2006, although in that case it was all options and no shares. Now it's all shares and no options.

I'd say I waited until the last hour before my Monday purchase at $511: Monday.tiff