ERICOPOLY

People thought the warrants were the best thing ever, but how fucked up can it get more than being leveraged and doing worse than plain vanilla common after a roaring 35% gain in the common? I mean, that's like being unable to get laid in a whorehouse.

I started this thread when the common was $12 and the warrants were $5.60. The common has appreciated 35% and the warrants only 28%.

It's not as worthwhile to obsess about it now. There are 1.5 fewer years remaining, and the cost is not above 13% annualized any longer. Originally the warrants were so expensive it was hard to understand why people wanted them.

That makes sense to me. Thanks for the explanation. You are correct that you could not argue for a lower margin rate. I was just looking for someway to account for the lost dividend with the calls and not with the warrants. I guess that is impossible without knowing before hand exactly how much the strike price will decrease each quarter between now and 2019. Use coomon+puts+margin instead of calls for comparing with warrants. This way lost dividends don't come into play.

Strike adjustment doesn't change cost of leverage. I'm using: cost of leverage = ((strike / (common-warrant))^(1 / 4.5 years)) - 1 If you change the strike price it changes the answer. How would you calculate the cost of leverage? For options the strike can't change (you lose the dividend), but for the warrants it will so that needs to be taken into account somehow. Subtract today's warrant price from today's stock price. The remainder then compounds to $13.30 at what rate? That's the cost of leverage. The warrant adjustments are merely a synthetic DRIP plan. Nothing more. Now, if you borrow money on margin to buy shares that you then enroll in a DRIP plan, can you then argue for a lower margin rate when dividends are paid? No.

Strike adjustment doesn't change cost of leverage.

Anyway, I don’t understand… If you don’t pay-out any dividend, how is it possible that BV is “relatively silly”? Where are all those retained earnings supposed to go? Gio They go to Eric Holder. Or to higher capital/leverage ratios (book value here would grow). Otherwise, they mostly go to shareholders via capital return. They will only go to book value if the bank needs to grow (like if there is the loan demand out there). Eric, I’d really like to understand: Who or what is Eric Holder? What do you mean by higher capital / leverage ratios? What do you mean by via capital return? Dividends? Any multiple depends on growth: growth is not a need, it is an opportunity. And I bet you are willing to pay different P/Es if the opportunity to grow is there, than if it is not. Gio Wikepedia has a story on Eric Holder higher capital and leverage ratios are regulatory tools used to de-neuter the big banks. capital return -> I meant dividends/buybacks there isn't much growth when your deposit base is this large. eventually expect about 30% of earnings to be retained and invested at the return implied by the return on tangible book. Return on tangible book matters more for a small company with huge growth potential -- "matters" in terms of the P/E you'll pay.

Ok, then let me put it another way: $2 / $14 = 14.3% $2 / $21 = 9.5% Am I buying a business with a 14.3% ROE, or a 9.5% ROE? Gio The $21 BV includes a bunch of goodwill. I just totally ignore it. Why ignore the goodwill? I know Buffett also calculates return on tangible net worth, but isn't the goodwill real money that the company put up when making acquisition? So shouldn't be counted when calculating real return on investment? Why only count the goodwill for stuff you acquired but not for stuff you grew organically? That just seems stupid to me. So if you instead just put a price on the actual earnings capability, or "earnings power", you capture all of the above. After all, if goodwill is to be based on anything at all of value, it's earnings power.

Nope. He's tired of people being stupid and focusing not on the obvious economic reward to investors -- earnings. It's earnings power that matters.

Anyway, I don’t understand… If you don’t pay-out any dividend, how is it possible that BV is “relatively silly”? Where are all those retained earnings supposed to go? Gio They go to Eric Holder. Or to higher capital/leverage ratios (book value here would grow). Otherwise, they mostly go to shareholders via capital return. They will only go to book value if the bank needs to grow (like if there is the loan demand out there).

Ok, then let me put it another way: $2 / $14 = 14.3% $2 / $21 = 9.5% Am I buying a business with a 14.3% ROE, or a 9.5% ROE? Gio The $21 BV includes a bunch of goodwill. I just totally ignore it.

I'm not Dazel, but it makes sense to invest based upon earnings, not book value. Buffett answers the question the same way. I've seen him state it multiple times -- "earnings power". He was asked a year ago if Citigroup interested him below book value, and he laughed and said that looking at book value was relatively silly, and that it's earnings that matter to the investor.

Other People's Picks I think Mohnish could do a rap video for his AGM, dressing and gesturing like Weird Al.

That is the Pabrai way - cloning - and it's a great advantage we small investors have at our disposal. I prefer O.P.P.

Knowing who the most competent investors are is a competency. You can cheat off of them competently.

Well, this is a different question than what you initially wrote. Ericopoly's response has a lot of insight to it. When you give your capital to someone else and let them make investment decisions with it, you are relying on their circle of competence -- it's an outsourcing transaction. If you make programmatic investment decisions based on WEB's portfolio, you are basically still outsourcing and relying on WEB's CoC. But to be making a smart decision, you are still relying on someone's circle of competence. I wasn't referring to BRK, but rather just Buffett himself... Like if you were his buddy and he offered to run your money for you. Anyway, on March 10th 2009 Buffett was on CNBC calling AXP a "heck of a deal". So, that was a second awesome stock tip. So you could have gone 50:50 in those two names.

On the other hand, they deserve less risk premium than before.

The premise of your question is incorrect. You only have to look the concept of circle of competence to understand why most people ought not to have put all of their money into WFC. WEB, remember, has unique insight into WFC and the financial sector, generally. Additionally, you don't really want to put all your eggs into one finance company during a financial crisis. That would be terrible risk management. WEB's just using a bit of hyperbole to indicate how cheap WFC really was at that time, and how great a company it was (and continues to be). We shouldn't be taking everything he says literally, especially because there are contradictions galore when you look at all his statements on investing/business. It's in my circle of competence to put all of my money into WEB's hands to invest on my behalf as he chooses. Now if he instead says "how about I wave the fee and just tell you what to buy?". Nope, then it's outside my circle of competence.

I am just curious to know how much people rely on their business judgment and knowledge, and how much on their margin of safety. I tend to rely more on my business judgment and knowledge, because only with good judgment and deep knowledge I find I can understand what my margin of safety truly is. Obviously, with BAC at $6 the margin of safety was so huge… that you could afford not knowing it very well! I agree. And I think also Buffett said he didn’t think BAC was as predictable as WFC, yet all BAC needed to do was to still be around 50 years from now… Very fine! But what about BAC at $16.5? I think the margin of safety has shrunk now, hasn’t it? Just curious… I know I am probably the least knowledgeable person about BAC on the board! ;) Gio You should go back over your arguments for not buying it at $8, $10, $12, etc.... It's still a black box. Black as it was then. You still can't understand the balance sheet or the derivatives. The management team still isn't what you like to think of as partners. The only thing you understand better today is how much the settlements cost.

I saw the news of the S&P500 crossing 2,000 today. It's up 4% annualized since the 2007 peak.

Yes. This could very well become the greatest investment he has ever made (or at least we know of) – especially in absolute terms. Heck, maybe even in relative terms – which is absolutely amazing, when you think about it. When else do you get an opportunity to invest 5 bn at once with this kind of leverage and risk/reward ratio? Early 2009 comes to mind. Hi guys, Everyone seems to agree BAC stock price is shooting much higher very soon! I also think it will, but you know I don’t even make the effort to understand something like BAC truly well… therefore, though I have a small investment, I must resist the temptation to invest really big money (at least for me! ;)). I have a question: I think the penalty BAC has just agreed to pay amounts to 3 years of earnings… And I was wondering if anyone of you expected it to be that high, or lower, or even higher. Just curious! :) Gio That depends... which three years of earnings? Expressed differently, it will probably amount to an infinite amount of this quarter's earnings.

That is going to be fun. Looking forward to it.

Yes. This could very well become the greatest investment he has ever made (or at least we know of) – especially in absolute terms. Heck, maybe even in relative terms – which is absolutely amazing, when you think about it. When else do you get an opportunity to invest 5 bn at once with this kind of leverage and risk/reward ratio? Early 2009 comes to mind.

Jim Cramer sees $2 in 2016: http://finance.yahoo.com/news/bac-pays-dues-freight-cars-173100867.html

I think I misunderstood your reason for using mortgage as your analogy. A mortgage can be paid off, but the funds are there to bring back as liquidity if needed (unless price of house drops). So I thought you were inferring that the pension worked like a mortgage... in which case I had to guess that you were suggesting that if rates skyrocketed back to some normalized interest rate level, it would become overfunded and the cash could then be brought back. Something like that. But I suppose, based on your reply, that is not the reason why you compared it to a mortgage.