BAC-WT - Bank of America Warrants

[ERICOPOLY]

But I think there are plenty of changes post-crisis that explain why multiples for the large banks have contracted compared to the overall equity markets.

 

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

 

[txlaw]

txlaw,

 

i understand what you are saying and  about circle of competence. I guess what i am trying to get at (not very eloquently, or maybe i am smoking crack) is:

 

if you had a logical being, completely logical, taking into the fact at hand, knowingly that he/she is not an expert in WFC or know what is going to happen WFC, also knowingly the fact WEB (his track record, knowledge in finance etc.) said to put all your money into WFC. so i guess from a logic whats the more logical choice, not in your circle of competence trumps WEB said so (a rare event)?

 

put another way if the above was a programming code if and else statement i guess the "not in your circle of competence" trumps "WEB said so considering how rare and how emphatic he was"?

 

put another way if web spoke to you "face to face" said txlaw you should put ALL your money into WFC, i would and am (assuming he could) you would say "no i don't feel comfortable about WFC so WEB sorry"? I agree with the circle of competence thing. I guess I don't see it as a "law" written in stone without ANY exceptions.

 

EDIT: with regards to can't take WEB's saying literally, i can see that, i agree to some extent. i guess I feel WEB if he was a lot poor with only a few million or even 100's of million he would prob put a very large amount into WFC if not all, i mean he has done this in the past (amex as an example) also even now WFC is a very large position. I mean you can look at what charlie has done. obviously we will never know.

 

EDIT: sorry for going off topic some what, i guess my point is are there exception to "circle of competence" (with regards to gio) i guess for some the answer is "no". this is not just in regards to some industry you are not familiar with. The idea of "Black box" fall into circle of competence too, in my opinion.

 

hy

 

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.

[ni-co]

The question find the most interesting is: Why is BAC still at 16?

 

Is it the fear of additional litigation?

 

On a P/E basis it's pretty much on top of the peer group ... about 11x 2015 consensus compared to roughly 12x for WFC, 10x for JPM, and 9.6x for Citi. So the question seems better phrased as why do the big banks trade so cheaply on a P/E basis compared to the S&P. But I think there are plenty of changes post-crisis that explain why multiples for the large banks have contracted compared to the overall equity markets.

 

If this is all there is, I'm very happy. Depressed earnings, cautious estimates, really low multiples for the whole industry, interest rates near historic lows. If we're lucky, all 4 conditions will change.

 

Consensus seems to be that we're going to have a financial crisis every 5 years from now on – a 9% earnings yield is not only too low for this interest rate environment, it's much too low for such a high ROE business like banking, even if you assume normal interest rates.

[txlaw]

Any insurance company is a black box. 

 

Yet you've invested in FFH and LRE, no?

 

Well, I don’t really understand what many of you mean with “black box”…

 

I repeat: I have what I think are very strict criteria for investing in a business. Whenever those criteria are met (and that’s what I mean by “deep knowledge”… or let me correct myself: deep ENOUGH knowledge), I invest. Whenever those criteria aren’t met, I don't invest. Period.

And nobody, not even a suggestion from Buffett, usually can change my mind.

 

Gio

 

I don't doubt that you have very strict criteria for investing in a business.  You don't need to repeat that, as you've made it quite clear in your posts.

 

But the question is whether or not your criteria are rational, whether you're actually sticking to these criteria, and why you think certain investments do or do not meet your criteria.

 

It's hard to tell because you refuse to invest in BAC (or any banks, apparently), but you are more than willing to invest in insurance companies.  I guess I just don't understand why FFH and LRE meet your investment criteria, whereas all banks do not.

[giofranchi]

Is this true regardless of the odds or the size of the payoff? You have the same criteria for investments that have let's say 1.5x potential as for those with 10x potential?

 

Buffett always mentions the "circle of competence" in this context. But I think that it's not a good image. It implies you're either inside or outside your circle, whereas I believe that this is more of a gradual thing. This is a matter of personal preference, I guess, but I like to look at it more probabilistically: What do I expect to lose if I'm wrong vs. what do I expect to gain if I'm right? What are the odds? I'm aware of the fact that the quality of my guesses depends on my knowledge of the subject. Yet, thinking of it this way enables you to scale your position in dependence on knowledge and your best guess of the odds.

 

Yes, I think you are right. And I definitely lack some flexibility…

I will have to work hard on that! ;)

 

Gio

 

[giofranchi]

But the question is whether or not your criteria are rational

 

Of course they are rational to me… And they have served me well until now… But, like I have just said, admitting a dangerous lack of flexibility, they surely might be improved in many ways!

 

Gio

 

[hyten1]

txlaw, funny thing, i get a different take on what eric wrote, i got if you are willing to invest in BRK, then why don't you listen to his "direct investment suggestions"? i guess eric can tell us what he meant.

 

i mean sure its "someone's" circle of competence, that is exactly the point, i don't think the idea of circle of competence is written in stone, just because you don't have the competence you should forget about it. in this case "WEB suggestion" out weights "your lack of competence" in WFC, in my opinion.

 

i guess the entire point is with regards to Gio. I understand gio you don't like to invest in things you don't have "enough knowledge" of and i get that. but sometimes .... maybe ...  not just because of 2020 hindsight, sometimes its more logical to invest without personal circle of competence and rely on someone else's :) jmho.

 

obviously we have be very selective on who these people are and on what topic. but also gio are you relying on FFH's managment's circle of competence? maybe you have a good knowledge of everything they invest in.

 

 

hy

 

 

 

txlaw,

 

i understand what you are saying and  about circle of competence. I guess what i am trying to get at (not very eloquently, or maybe i am smoking crack) is:

 

if you had a logical being, completely logical, taking into the fact at hand, knowingly that he/she is not an expert in WFC or know what is going to happen WFC, also knowingly the fact WEB (his track record, knowledge in finance etc.) said to put all your money into WFC. so i guess from a logic whats the more logical choice, not in your circle of competence trumps WEB said so (a rare event)?

 

put another way if the above was a programming code if and else statement i guess the "not in your circle of competence" trumps "WEB said so considering how rare and how emphatic he was"?

 

put another way if web spoke to you "face to face" said txlaw you should put ALL your money into WFC, i would and am (assuming he could) you would say "no i don't feel comfortable about WFC so WEB sorry"? I agree with the circle of competence thing. I guess I don't see it as a "law" written in stone without ANY exceptions.

 

EDIT: with regards to can't take WEB's saying literally, i can see that, i agree to some extent. i guess I feel WEB if he was a lot poor with only a few million or even 100's of million he would prob put a very large amount into WFC if not all, i mean he has done this in the past (amex as an example) also even now WFC is a very large position. I mean you can look at what charlie has done. obviously we will never know.

 

EDIT: sorry for going off topic some what, i guess my point is are there exception to "circle of competence" (with regards to gio) i guess for some the answer is "no". this is not just in regards to some industry you are not familiar with. The idea of "Black box" fall into circle of competence too, in my opinion.

 

hy

 

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.

[txlaw]

txlaw, funny thing, i get a different take on what eric wrote, i got if you are willing to invest in BRK, then why don't you listen to his "direct investment suggestions"? i guess eric can tell us what he meant.

 

i mean sure its "someone's" circle of competence, that is exactly the point, i don't think the idea of circle of competence is written in stone, just because you don't have the competence you should forget about it. in this case "WEB suggestion" out weights "your lack of competence" in WFC, in my opinion.

 

i guess the entire point is with regards to Gio. I understand gio you don't like to invest in things you don't have "enough knowledge" of and i get that. but sometimes .... maybe ...  not just because of 2020 hindsight, sometimes its more logical to invest without personal circle of competence and rely on someone else's :) jmho.

 

hy

 

I'm actually agreeing with you that the CoC rule is more complex than it seems.  If you put your money into FAIRX, you might actually be saying that Bruce B's CoC outweighs your lack of competence on SHLD, AIG, BAC, etc. 

 

But listening to someone's view on what is a good investment or outsourcing investment decisions to an investment manager is quite different than putting all of your money into a single investment based on a recommendation.  That's a portfolio management decision that many would say ignores the question of "risk" and one's personal financial situation. 

 

Also, Berkshire is a conglomerate and represents a cross section of the best of American business.  So putting all your money into BRK is way different than investing all of it into WFC.

[txlaw]

But the question is whether or not your criteria are rational

 

Of course they are rational to me… And they have served me well until now… But, like I have just said, admitting a dangerous lack of flexibility, they surely might be improved in many ways!

 

Gio

 

Ah, but your admission is no admission at all. ;) 

 

There is nothing wrong with having bright line rules if they serve you well and lead to good results.  But then to claim (or imply) that that particular set of bright line rules is optimal in all case, and to ignore that one's personal proclivities might have something to do with why they may be optimal for one's personal situation, is wrong-headed. 

 

There's no need to be coy, btw Gio, about your views on whether it is a good investment decision to put money into BAC.  I thought Italians were supposed to be straight forward! ;D 

[hyten1]

txlaw, i hear ya, i agree about portfolio risk.

 

my original idea for using WFC's suggetsion (all in) is to illustrate this point of how we are not very logical. at least in my opinion the logical thing to do is to invest big into WFC when WEB utter those rare suggestions, but i am sure most of us didn't do that (myself included, i initiated a position but not a big one).  life is so much simpler if we chose to do simple things :)

 

hy

 

txlaw, funny thing, i get a different take on what eric wrote, i got if you are willing to invest in BRK, then why don't you listen to his "direct investment suggestions"? i guess eric can tell us what he meant.

 

i mean sure its "someone's" circle of competence, that is exactly the point, i don't think the idea of circle of competence is written in stone, just because you don't have the competence you should forget about it. in this case "WEB suggestion" out weights "your lack of competence" in WFC, in my opinion.

 

i guess the entire point is with regards to Gio. I understand gio you don't like to invest in things you don't have "enough knowledge" of and i get that. but sometimes .... maybe ...  not just because of 2020 hindsight, sometimes its more logical to invest without personal circle of competence and rely on someone else's :) jmho.

 

hy

 

I'm actually agreeing with you that the CoC rule is more complex than it seems.  If you put your money into FAIRX, you might actually be saying that Bruce B's CoC outweighs your lack of competence on SHLD, AIG, BAC, etc. 

 

But listening to someone's view on what is a good investment or outsourcing investment decisions to an investment manager is quite different than putting all of your money into a single investment based on a recommendation.  That's a portfolio management decision that many would say ignores the question of "risk" and one's personal financial situation. 

 

Also, Berkshire is a conglomerate and represents a cross section of the best of American business.  So putting all your money into BRK is way different than investing all of it into WFC.

[txlaw]

txlaw, i hear ya, i agree about portfolio risk.

 

my original idea for using WFC's suggetsion (all in) is to illustrate this point of how we are not very logical. at least in my opinion the logical thing to do is to invest big into WFC when WEB utter those rare suggestions, but i am sure most of us didn't do that (myself included, i initiated a position but not a big one).  life is so much simpler if we chose to do simple things :)

 

hy

 

 

Here's an even crazier thing. 

 

In October 2008, WEB basically told the world, "Buy American.  I am."  If you had, at that point, bought the SPY and forgotten about it (perhaps reinvesting the divs), you would have had an outstanding compound return.

 

The way people behave is why we, the value investors, have success in the capital markets.

[ERICOPOLY]

txlaw, funny thing, i get a different take on what eric wrote, i got if you are willing to invest in BRK, then why don't you listen to his "direct investment suggestions"? i guess eric can tell us what he meant.

 

i mean sure its "someone's" circle of competence, that is exactly the point, i don't think the idea of circle of competence is written in stone, just because you don't have the competence you should forget about it. in this case "WEB suggestion" out weights "your lack of competence" in WFC, in my opinion.

 

i guess the entire point is with regards to Gio. I understand gio you don't like to invest in things you don't have "enough knowledge" of and i get that. but sometimes .... maybe ...  not just because of 2020 hindsight, sometimes its more logical to invest without personal circle of competence and rely on someone else's :) jmho.

 

obviously we have be very selective on who these people are and on what topic. but also gio are you relying on FFH's managment's circle of competence? maybe you have a good knowledge of everything they invest in.

 

 

hy

 

 

 

txlaw,

 

i understand what you are saying and  about circle of competence. I guess what i am trying to get at (not very eloquently, or maybe i am smoking crack) is:

 

if you had a logical being, completely logical, taking into the fact at hand, knowingly that he/she is not an expert in WFC or know what is going to happen WFC, also knowingly the fact WEB (his track record, knowledge in finance etc.) said to put all your money into WFC. so i guess from a logic whats the more logical choice, not in your circle of competence trumps WEB said so (a rare event)?

 

put another way if the above was a programming code if and else statement i guess the "not in your circle of competence" trumps "WEB said so considering how rare and how emphatic he was"?

 

put another way if web spoke to you "face to face" said txlaw you should put ALL your money into WFC, i would and am (assuming he could) you would say "no i don't feel comfortable about WFC so WEB sorry"? I agree with the circle of competence thing. I guess I don't see it as a "law" written in stone without ANY exceptions.

 

EDIT: with regards to can't take WEB's saying literally, i can see that, i agree to some extent. i guess I feel WEB if he was a lot poor with only a few million or even 100's of million he would prob put a very large amount into WFC if not all, i mean he has done this in the past (amex as an example) also even now WFC is a very large position. I mean you can look at what charlie has done. obviously we will never know.

 

EDIT: sorry for going off topic some what, i guess my point is are there exception to "circle of competence" (with regards to gio) i guess for some the answer is "no". this is not just in regards to some industry you are not familiar with. The idea of "Black box" fall into circle of competence too, in my opinion.

 

hy

 

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.

[ERICOPOLY]

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

[cubsfan]

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

 

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

[ERICOPOLY]

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

 

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

 

I prefer O.P.P.

[rkbabang]

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

 

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

 

I prefer O.P.P.

 

Yeah, you know me.

 

[cubsfan]

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

 

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

 

I prefer O.P.P.

 

Ok, you got me - O.P.P. = Other people's ???

 

 

[gary17]

portfolio ??

[rogermunibond]

Early 90s hip hop reference.

[zizov]

panic

[ERICOPOLY]

Other People's Picks

 

I think Mohnish could do a rap

video for his AGM, dressing and gesturing like Weird Al.

[xazp]

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.

>>

 

It's about half a year of earnings, not three years.  You have to understand the structure of the settlement, what's actual cost and what's fluff.  I think it comes out to roughly 70c/share after tax, so about a half year. 

 

[giofranchi]

Ah, but your admission is no admission at all. ;) 

 

I will try to be more straightforward then… ;)

 

I only invest with people I have come to respect and admire. It is not easy at all to win my respect and admiration as an entrepreneur… because I think I am a good entrepreneur myself… I hope a lack of false modesty on my part doesn’t bother you… And I respect and admire only people I have come to reckon as better entrepreneurs than me!

Then I invest with those people only when I can do so at what I consider the right price (which is what I call “value investing”).

 

It might be only a coincidence, but I don’t know a single person in the whole banking industry that I judge to be a great entrepreneur. Certainly not the CEO of BAC.

 

And let me be clear about this point: I know very well I might be wrong in my judgment. Buffett has often expressed admiration for what the CEO of BAC is doing… therefore, probably I am wrong indeed! But I don’t care. Either I get to admire someone, or I don’t. Period.

 

My lack of flexibility is what ni-co referred to. And what Howard Marks often says: every business at the right price is a good investment. Well, I am simply not able to follow that advice… If I don’t see someone I admire, the stock price means nothing to me… But this doesn’t mean I won’t be able to develop a more opportunistic behavior going forward.

 

Gio

 

[Guest Dazel]

Gio,

 

 

Because of our past discussions and your obvious "great" contribution to the board I will add one single response to your questions...from my point of view. Not detailed...

 

1. Bank of America and Merrill Lynch is global brand that has been tarnished but still is among the very best in the world...Merrill Lynch is the second largest investment bank globally by deal numbers.

 

2. They have pushed the company towards wealth management as a top priority-I love that business...it's a money printer...not unlike royalty revenue that you "know" I like...

 

 

3. $25b in NOL's are not in the book value right now....the only positive from the massive lawsuits aftermath.

 

4. I am not for a second worried about using the NOL's as they will be used quickly

 

5. An interest rise would help earnings...

 

6. I like the CEO and management as the power of the bank has headed back to Boston...old Fleet

Boston bank power which is old fashioned banking....we have Merrill Lynch to create more value internationally.

 

7. The market is looking in the rearview mirror....I am not not...forward earnings will be very good in

relation to what I am buying today.

 

8. When the market realizes number 8... B of A will command a Buffett premium as does Wells Fargo and AXP...this will coincide with dividend raises and buybacks if the realization of price takes awhile.

 

9. According to Jeremy Grantham (you know I follow his thinking) we will likely enter the greatest deal making time of any other in history....B of A will participate in a big way here...with big profits.

 

 

10. Lawsuits are over....yet the market does not realize it yet...B of A has emerged with $1.1 trllion in deposits making them maybe the most secure of any any bank on the planet....they have been in cut and survive mode for 6 years...it was "not" in their best interest to show big profits because the lawsuits would have capitalized on this to seek more money from them...I expect them to get aggressive in a campaign to repair their image and brand.

 

 

There is one negative... derivatives....however, all central banks are in concert right now on stability

and I have come to terms his risk being mitigated in "this" environment. This might change a few years from now...not sure.

 

Dazel

[txlaw]

My lack of flexibility is what ni-co referred to. And what Howard Marks often says: every business at the right price is a good investment. Well, I am simply not able to follow that advice… If I don’t see someone I admire, the stock price means nothing to me… But this doesn’t mean I won’t be able to develop a more opportunistic behavior going forward.

 

Gio, this is a totally fine approach.  A lack of flexibility -- or looking at it more positively, sticking to one's methodology -- can be very beneficial, taking into account one's personal situation.  For example, only investing with great "entrepreneurs" is a fine approach to take.  To each his own.

 

However, I think the issue is that it is sometimes hard to tell whether you are truly exploring other people's investing approaches, or subtly lecturing people on why their approach is incorrect for X reason.  For example, if you say "I'm trying to understand what people see in BAC because I don't like to invest in black boxes or companies where management is not trustworthy or competent," you don't really seem to be asking a question. 

 

Instead, it feels like an opinion rather than a real question.  That's all I meant by being straightforward. 

 

As to great entrepreneurs in the banking industry, there are plenty of them, although I suppose it depends on what you mean by entrepreneur.  I'd also point out that, in many cases as an investor, you don't want a great entrepreneur -- you want a great manager.  This is very true of the banking sector!  (It's why I'm a huge fan of Jamie Dimon.)