BAC cheering thread

[bargainman]

So you're long the stock, long some puts and your shorting a bond (by using margin).  My vague recollection of the theory of put-call parity is that you've set up a position that roughly mimics a long position in a call.  Is there a particular reason why you just didn't buy leaps instead?

 

Just curious.

 

My strategy has two key features that I like:

1)  you can move up the strike price of the hedge as the share price rises (you can sell the original hedge to harvest some of the value)

2)  tax advantages (if this becomes a long term holding you don't get to take a tax loss on the call option volatility premium until you sell).  But the put premium can be deducted as soon as it expires (or you sell it)

 

Scenario (call):

1)  You bought the $5 strike 2014 call in December when it was trading for $2.

2)  Stock moves to $10 and you want to move up the strike price of your hedge?  Can't do it.

 

Scenario (margin+put)

1)  You buy the common with margin at $5 per share in December and the put costs you $2 to hedge

2)  Stock moves up to $10 and you want to move up the strike price?

3)  Answer:  Buy the $10 put and sell the original $5 put

 

Well in the call scenario you change the hedge by selling the 5 strike calls and buying the 10 strike calls.  it's just put call equivalence after all.  Anything you can do with puts one way you can do with calls the other.  But the tax advantages are the real difference.  If you sold the calls to a higher strike you'd get hit with taxes.  No great way around that.  (other than buying puts at that stage...)

[ERICOPOLY]

Well in the call scenario you change the hedge by selling the 5 strike calls and buying the 10 strike calls.  it's just put call equivalence after all.  Anything you can do with puts one way you can do with calls the other.  But the tax advantages are the real difference.  If you sold the calls to a higher strike you'd get hit with taxes.  No great way around that.  (other than buying puts at that stage...)

 

Exactly, this is entirely driven by taxes.

 

In my RothIRA I can't even use margin, and taxes are not an issue.  So in that account I can do it exactly as you say.

 

This way of doing things is only temporary.  Once I get to $10 per share on BAC I will write a deep-in-the-money long term call.  My $10 strike calls that I purchased (already) will then take over.  At that point I won't have a margin loan anymore and will have a much larger gain locked in.

[Parsad]

"There are weeks, sometimes months, in fact, when I don't make a bet at all, because there simply is no play. So I wait. Plan. Marshal my resources. And when I finally see an opportunity, I bet it all."

 

Ericopoly = Arnold Rothstein from Boardwalk Empire  8)

 

hehehe but he thought of himself a gambler not a value investor ... and he died young I think

 

http://en.wikipedia.org/wiki/Arnold_Rothstein

 

 

I believe what I do lights up the same reward centers in the brain that keep gamblers at the table.

 

It feels good when it goes up, I want to buy more when it goes down, it's never "enough".  That's a gambler.

 

However that 20% is still a nice amount of money that pays off our mortgage, funds the education for the children, and leaves a few year's of my prior pre-tax earnings to fund our after-65 nest egg.

 

So I'll still be comfortable.  It will be one of those "better to have loved and lost than never to have loved at all" stories.  My kids might actually grow up much better seeing us as a normal working family -- did you see that photo of the Romney boys???  Yuck!!!

 

Disagree with you.  The same part of the brain may activate, but what you do is completely different than a gambler. 

 

- Gambler's make bets solely on the probability of a specific event possibly occurring. 

- You, along with any intelligent investor, do not make "bets" on an event possibly occurring, but that an event is completely inevitable...the event being that other investors eventually recognize the underlying value of something that has been completely mispriced. 

 

I would say it's more akin to someone rumaging through garage sales or attics, and looking for things that other people haven't recognized as having enormous value.  The same joy may run through your brain and veins as a gambler who has won big, but it is as dissimiliar as any two things in life could be.  Cheers!   

[PlanMaestro]

When to bet it all ... Arnold Rothstein the gambler

 

[ERICOPOLY]

"There are weeks, sometimes months, in fact, when I don't make a bet at all, because there simply is no play. So I wait. Plan. Marshal my resources. And when I finally see an opportunity, I bet it all."

 

Ericopoly = Arnold Rothstein from Boardwalk Empire  8)

 

hehehe but he thought of himself a gambler not a value investor ... and he died young I think

 

http://en.wikipedia.org/wiki/Arnold_Rothstein

 

 

I believe what I do lights up the same reward centers in the brain that keep gamblers at the table.

 

It feels good when it goes up, I want to buy more when it goes down, it's never "enough".  That's a gambler.

 

However that 20% is still a nice amount of money that pays off our mortgage, funds the education for the children, and leaves a few year's of my prior pre-tax earnings to fund our after-65 nest egg.

 

So I'll still be comfortable.  It will be one of those "better to have loved and lost than never to have loved at all" stories.  My kids might actually grow up much better seeing us as a normal working family -- did you see that photo of the Romney boys???  Yuck!!!

 

Disagree with you.  The same part of the brain may activate, but what you do is completely different than a gambler. 

 

- Gambler's make bets solely on the probability of a specific event possibly occurring. 

- You, along with any intelligent investor, do not make "bets" on an event possibly occurring, but that an event is completely inevitable...the event being that other investors eventually recognize the underlying value of something that has been completely mispriced. 

 

I would say it's more akin to someone rumaging through garage sales or attics, and looking for things that other people haven't recognized as having enormous value.  The same joy may run through your brain and veins as a gambler who has won big, but it is as dissimiliar as any two things in life could be.  Cheers! 

 

I like that more flattering depiction.

 

However, my wife and I have already had the discussion that when BAC hits $20 we will push some money out to secure dividend payers like the JNJ and PG's of the world (in a completely separate account), some un-leveraged REIT funds (if they exist), and the like.  All that stuff in the RothIRA.  I can then sweep the dividends from them to my self-managed ROTH account.  We're going to keep a big chunk of BAC in the taxable account and use a big chunk for purchasing a house with cash.

 

The $20 BAC price produces a totally sick amount of money.  And look at those Romney boys and that $100m trust fund.  I don't want my kids to have that much. 

 

 

So this is my "last big score".  Ha ha  ;)

 

[PlanMaestro]

So this is my "last big score".  Ha ha  ;)

 

Ha ha ha. So many movies come to mind, ha ha ha.

 

Only one question Eric. You are not only betting all, or mostly all, but you are also betting on the timing of the event, aren't you?

 

PS: I would not be able to convince my wife of doing something remotely like this, lucky you.

[Guest Hester]

Parsad, But it's still a bet. If it involves putting up capital, wagering on an uncertain outcome, it's a bet. Even if the outcome seems certain to you, nothing is certain. Rummaging through garage sales for hidden treasures is a bet you can sell that item to someone else for a higher price.

 

So both gambling and investing are betting. Gambling is more the excitement of betting on a random outcome, whereas investing is a less emotional betting, when you think the risk adjusted odds are in your favor. The desired outcome of gambling and investing is the same, it's the process that differentiates the two.

 

I think you can find a few investors in some corners of the casino (probably poker) and plenty of gamblers in the stock market.

 

[ERICOPOLY]

So this is my "last big score".  Ha ha  ;)

 

Ha ha ha. So many movies come to mind, ha ha ha.

 

Only one question Eric. You are not only betting all, or mostly all, but you are also betting on the timing of the event, aren't you?

 

PS: I could not convince my wife of doing something like this, lucky you.

 

I told her that it will be socially acceptable to the 99% if our story is that we made millions robbing the owners of Bank of America.

[PlanMaestro]

I told her that it will be socially acceptable to the 99% if our story is that we made millions robbing the owners of Bank of America.

 

I was thinking on the downside but that works too

[Smazz]

 

Keep the cash.  While BAC is still very cheap, the markets in general have gone up quite quickly, and the world's problems haven't suddenly disappeared.  Things will get cheaper again, be it the entire market or an individual stock...just wait for the fat pitch.

I agree

[ERICOPOLY]

Anyways,

 

BAC dropped 1.34% today and WFC dropped 1.05%.  C dropped 2.18%.

 

My point is the BAC scare is over.  I bet traders will now buy BAC and hedge with WFC or JPM short.

[ERICOPOLY]

Only one question Eric. You are not only betting all, or mostly all, but you are also betting on the timing of the event, aren't you?

 

That's why I wasn't a fan of the warrants.  I figured if there was a big hit from something there is dilution risk.  So that seemingly low strike price could turn out quite high. 

 

I calculated out that if you instead did a 1.2x leverage approach using stock+margin (and some protective puts) it winds up being the same returns as long as the leverage is maintained.  So I have some far-out-of-the-money calls that I can use to ramp up the leverage as price rises (to keep it at 1.2x).  Then some extra calls to lock in gains as well.

 

This produces the same returns as the warrants but with less timing risk.

[indirect]

Eric,

 

I was with you and Al on the FFH leaps. I was getting paid 13-15% on my stock loan which I used to buy the leaps, converted to stock in 2006 and still holding the shares. I do not have your guts,and hats off to you, however I do believe in 20 tks that WB talks about and my 3 tickets since fairfax has been LUK(fall 08-march 09), WFC warrants(since issue)  and now BAC common (nov12).

 

Good luck to both of us,

 

indirect.

[Parsad]

Parsad, But it's still a bet. If it involves putting up capital, wagering on an uncertain outcome, it's a bet. Even if the outcome seems certain to you, nothing is certain. Rummaging through garage sales for hidden treasures is a bet you can sell that item to someone else for a higher price.

 

So both gambling and investing are betting. Gambling is more the excitement of betting on a random outcome, whereas investing is a less emotional betting, when you think the risk adjusted odds are in your favor. The desired outcome of gambling and investing is the same, it's the process that differentiates the two.

 

I think you can find a few investors in some corners of the casino (probably poker) and plenty of gamblers in the stock market.

 

I disagree.  If you see a company that has $10M in cash, no debt, no other liabilities and is not losing money, but its market capitalization is at $6M, how is that gambling?  There may be gamblers in the stock market, and investors in casinos, but they don't look for the same thing as the intelligent investor, nor do they conduct themselves in that manner.  Cheers!

[PlanMaestro]

There may be gamblers in the stock market, and investors in casinos, but they don't look for the same thing as the intelligent investor, nor do they conduct themselves in that manner.

 

And Eric "Rothstein" has done his due dilligence and I will stop here.

 

[rranjan]

Go! Go! Go!

 

;D ;D  Why only BAC?

 

It's my only long position.  My only short position too (short term put hedges purchased recently).

 

I knew you were concentrated here but did not think BAC as your only position. As long as you are fine with unlikely event of BAC going to zero, it's ok. Don't you think that making this kind of bet when you were in MSFT was fine but right now risk doesn't justify the reward? Well, you said you still have 20% left and you are comfortable with that.

 

Having said this, I don't think there is any problem with this approach as long as both of you are comfortable with 20% leftover money.

 

[txlaw]

Go! Go! Go!

 

;D ;D  Why only BAC?

 

It's my only long position.  My only short position too (short term put hedges purchased recently).

 

Why did you sell MBI and AIG?

 

Just feel like BAC will move up at a steeper rate?

[ERICOPOLY]

Go! Go! Go!

 

;D ;D  Why only BAC?

 

It's my only long position.  My only short position too (short term put hedges purchased recently).

 

Why did you sell MBI and AIG?

 

Just feel like BAC will move up at a steeper rate?

 

Yes I just think BAC will recover first given it's premier position -- I mean who drives down the street without seeing a BofA?  The guy running MBI seems greedy and won't settle so it will take forever in the courts, and the AIG is held back by rock bottom interest rates which are staying low "forever".  BAC's catalyst is just to stop looking like they can't earn (the "NewBAC" addresses this as does the runoff of the legacy asset servicing drag).

 

I think I will be able to move into BAC warrants in the Roth when it gets near warrant strike price (hopefully on my birthday) and that will free up cash for some of the AIG warrants while keeping the BAC foot in the door.  I think the BAC $5 calls that I hold will outperform the warrants up to tangible book value, then I'll make the switch.

 

 

 

 

 

 

 

 

 

[ERICOPOLY]

I also think BAC was way more undervalued than AIG or MBI.

[Liberty]

When to bet it all ... Arnold Rothstein the gambler

 

 

I loved that speech when I saw it on the show. It's definitely very Buffett-esque... Or even Munger-esque.

[Ben Graham]

"There are weeks, sometimes months, in fact, when I don't make a bet at all, because there simply is no play. So I wait. Plan. Marshal my resources. And when I finally see an opportunity, I bet it all."

 

Ericopoly = Arnold Rothstein from Boardwalk Empire  8)

 

hehehe but he thought of himself a gambler not a value investor ... and he died young I think

 

http://en.wikipedia.org/wiki/Arnold_Rothstein

 

 

I believe what I do lights up the same reward centers in the brain that keep gamblers at the table.

 

It feels good when it goes up, I want to buy more when it goes down, it's never "enough".  That's a gambler.

 

However that 20% is still a nice amount of money that pays off our mortgage, funds the education for the children, and leaves a few year's of my prior pre-tax earnings to fund our after-65 nest egg.

 

So I'll still be comfortable.  It will be one of those "better to have loved and lost than never to have loved at all" stories.  My kids might actually grow up much better seeing us as a normal working family -- did you see that photo of the Romney boys???  Yuck!!!

 

Disagree with you.  The same part of the brain may activate, but what you do is completely different than a gambler. 

 

- Gambler's make bets solely on the probability of a specific event possibly occurring. 

- You, along with any intelligent investor, do not make "bets" on an event possibly occurring, but that an event is completely inevitable...the event being that other investors eventually recognize the underlying value of something that has been completely mispriced. 

 

I would say it's more akin to someone rumaging through garage sales or attics, and looking for things that other people haven't recognized as having enormous value. The same joy may run through your brain and veins as a gambler who has won big, but it is as dissimiliar as any two things in life could be.  Cheers! 

 

*******************************************************************************

 

Parsad, But it's still a bet. If it involves putting up capital, wagering on an uncertain outcome, it's a bet. Even if the outcome seems certain to you, nothing is certain. Rummaging through garage sales for hidden treasures is a bet you can sell that item to someone else for a higher price.

 

So both gambling and investing are betting. Gambling is more the excitement of betting on a random outcome, whereas investing is a less emotional betting, when you think the risk adjusted odds are in your favor. The desired outcome of gambling and investing is the same, it's the process that differentiates the two.

 

I think you can find a few investors in some corners of the casino (probably poker) and plenty of gamblers in the stock market.

 

I disagree. If you see a company that has $10M in cash, no debt, no other liabilities and is not losing money, but its market capitalization is at $6M, how is that gambling? There may be gamblers in the stock market, and investors in casinos, but they don't look for the same thing as the intelligent investor, nor do they conduct themselves in that manner.  Cheers!

 

 

1. I would say it's more akin to someone rumaging through garage sales or attics, and looking for things that other people haven't recognized as having enormous value.

 

This is where the Kings of value investing look first.

 

Francis Chou

 

Value investors like stocks that are obscure and undesirable.

 

It's an investing style once described by the late, great value guru Benjamin Graham as the equivalent of rifling through a store's discount bin. In other words, if you are patient enough to search endlessly and smart enough to know the difference between a true bargain and a bad knockoff, then you can make terrific money.

 

http://v1.theglobeandmail.com/partners/free/globeinvestor/investment/may08/chou.html

 

*******************************************************************************

 

2. If you see a company that has $10M in cash, no debt, no other liabilities and is not losing money, but its market capitalization is at $6M, how is that gambling?

 

This is exactly what SEAM does.

 

Southeastern Asset Management.Inc.

 

Investment Approach

 

http://www.longleafpartners.com/about_us/investment_approach

 

 

Good Price

 

P/V = 60% or less where intrinsic value is determined by:

•Present value of free cash flow

•Net asset value

•Comparable business sales

 

[txlaw]

Go! Go! Go!

 

;D ;D  Why only BAC?

 

It's my only long position.  My only short position too (short term put hedges purchased recently).

 

Why did you sell MBI and AIG?

 

Just feel like BAC will move up at a steeper rate?

 

Yes I just think BAC will recover first given it's premier position -- I mean who drives down the street without seeing a BofA?  The guy running MBI seems greedy and won't settle so it will take forever in the courts, and the AIG is held back by rock bottom interest rates which are staying low "forever".  BAC's catalyst is just to stop looking like they can't earn (the "NewBAC" addresses this as does the runoff of the legacy asset servicing drag).

 

I think I will be able to move into BAC warrants in the Roth when it gets near warrant strike price (hopefully on my birthday) and that will free up cash for some of the AIG warrants while keeping the BAC foot in the door.  I think the BAC $5 calls that I hold will outperform the warrants up to tangible book value, then I'll make the switch.

 

Would disagree with you on MBIA CEO being greedy.  Keep in mind that this is complex commercial litigation with multiple strategic aspects to it.

 

I actually think AIG has been more undervalued than BAC for most of the past two years, save for when BAC collapsed down to around $5.  Long term, AIG is probably a better global growth platform, while BAC will be like a premiere US utility, generating piles of cash for its shareholders.  ML is a global biz, but I'm not so sure it will be as effective globally as a GS or MS over the long run. 

 

I think AIG has been kept down by interest rates, the insurance cycle, wild swings in its earnings,  a general misunderstanding of the assets and liabilities of AIG, and the government ownership overhang.  The only reason I didn't own any AIG up until now is because I was trying to time a shift of capital to AIG after BAC and MBI "worked out."  I was wrong on which ones would go up first.  Turns out, all three stocks collapsed after I started establishing my positions. 

 

C'est la vie.

[PlanMaestro]

The only reason I didn't own any AIG up until now is because I was trying to time a shift of capital to AIG after BAC and MBI "worked out." 

 

Was trying to do the same here with other stocks, waiting to put it all in AIG and BAC when they cashed out. Investing is a game of regrets, balancing what and when to buy and sell. If I did not buy BAC and AIG at those prices, and many in this board probably thought the same, and they run afterwards, as it happened, I would have kicked myself for eternity.

 

Some stocks are on third, others on second, all ready to run to home. But it is hard to predict which ones are going to get their single first. Did I get my baseball right?

[racemize]

The only reason I didn't own any AIG up until now is because I was trying to time a shift of capital to AIG after BAC and MBI "worked out." 

 

Was trying to do the same here with other stocks, waiting to put it all in AIG and BAC when they cashed out. Investing is a game of regrets, balancing what and when to buy and sell. If I did not buy BAC and AIG at those prices, and many in this board probably thought the same, and they run afterwards, as it happened, I would have kicked myself for eternity.

 

Some stocks are on third, others on second, all ready to run to home. But it is hard to predict which ones are going to get their single first. Did I get my baseball right?

 

I think they'd have to be in different games for it to make sense.  A single might bring in both the 2nd and 3rd's to home, or just advance each once.  In any event, the single would apply to all of them at once, not separately (in the same game).

[biaggio]

Very entertaining and informative info (as usual) guys.

 

Keep the posts coming.