Chou funds semi-annual report

[ECCO]

http://www.choufunds.com/pdf/SemiR12p.pdf

[fareastwarriors]

Thanks for posting.

 

Investing in U.S. Financial Institutions Following up on a past letter, we continue to believe U.S. financial institutions are very cheap and TARP warrants associated with these companies are an attractive way to invest in them. Depending on the price, TARP warrants have several characteristics that make them appealing long-term investments. Specifically, they are long dated, with most expiring around 2018-2019. This time frame of six-plus years allows banks to grow their intrinsic value to a high enough level to have an appreciable impact on the strike price of the stock warrant. In addition, we believe the strike price will be adjusted downward for any quarterly dividend that exceeds a set price. This is rarely seen in a stock warrant. An example: for Bank of America, class 'A' warrants, the strike price is adjusted downward for any quarterly dividend paid exceeding one cent a share.

 

Bank TARP warrants are complex, with terms and conditions that are unique to each bank. Thus we encourage you to research them for yourself and draw your own conclusions. The legalese is quite intimidating but there is some help on the way. Some banks have started to pay dividends that exceed a set price, and we are starting to see how anti-dilution clauses that were added to protect TARP warrant holders apply with regard to:

1) The adjustment of the strike price.

2) The adjustment to the number of shares you can purchase for each warrant you hold.

[ECCO]

Francis Chou still praise investing in us financial and TARP warrant, but on the other side he has sold half his warrant of BAC? I dont get it...

[berkshiremystery]

Francis Chou still praise investing in us financial and TARP warrant, but on the other side he has sold half his warrant of BAC? I dont get it...

 

I had already seen this some while ago,... but don't worry,... it only seems he had managed to average in and out a little. He bought at much higher prices,... very early, and bought at lower values in the 2nd half of 2011, thus averaging down,... probably around the December lows around $2.00. It seems that he trimmed some of these purchases recently.

 

http://holdings.nasdaq.com/asp/OwnerPortfolio.asp?FormType=OwnerPortfolio&CIK=0001389403&HolderName=CHOU+ASSOCIATES+MANAGEMENT+INC%2E

 

http://www.investorpoint.com/stock/BAC.WS.A-BANK%20OF%20AMERICA%20WARRANTS/

 

I personally don't plan to trim my a warrants.

[Parsad]

I always like Francis' frank dissection of his mistakes.  Like Buffett, he makes much more of his mistakes than any successes...tremendous humility.  Cheers! 

[MrB]

Francis Chou still praise investing in us financial and TARP warrant, but on the other side he has sold half his warrant of BAC? I dont get it...

 

I had already seen this some while ago,... but don't worry,... it only seems he had managed to average in and out a little. He bought at much higher prices,... very early, and bought at lower values in the 2nd half of 2011, thus averaging down,... probably around the December lows around $2.00. It seems that he trimmed some of these purchases recently.

 

http://holdings.nasdaq.com/asp/OwnerPortfolio.asp?FormType=OwnerPortfolio&CIK=0001389403&HolderName=CHOU+ASSOCIATES+MANAGEMENT+INC%2E

 

http://www.investorpoint.com/stock/BAC.WS.A-BANK%20OF%20AMERICA%20WARRANTS/

 

I personally don't plan to trim my a warrants.

 

I think one is better served to take Francis on his word, meaning that if he says he still likes something and sells it, it is not a contradiction. Any fund manager will tell you that you are sometimes forced to sell things you do not want to sell e.g. redemption, increasing your weight of cash as a hedge, regulatory changes (especially in the case of warrants) etc.

In the case of the warrants different countries have different rules around how much you can weigh a stock v a warrant and whether you use market value or cost, strike etc, which can impact your decision to switch between the two.

 

Just something to bear in mind.

[returnonmycapital]

I think what may have happened is that he felt he owned too many of the warrants. The diversification rules suggest that derivatives be treated notionally. If the fund owned 100 warrants, it should calculate its exposure as if it owned 100 underlying shares. Reporting mutual funds, as the Chou funds are, should limit exposure to a single issuer to no more than 10% of fund net assets, at time of purchase. If a fund should go over 10%, the manager has a reasonable amount of time to correct the situation. That may be what transpired.

[MrB]

I think what may have happened is that he felt he owned too many of the warrants. The diversification rules suggest that derivatives be treated notionally. If the fund owned 100 warrants, it should calculate its exposure as if it owned 100 underlying shares. Reporting mutual funds, as the Chou funds are, should limit exposure to a single issuer to no more than 10% of fund net assets, at time of purchase. If a fund should go over 10%, the manager has a reasonable amount of time to correct the situation. That may be what transpired.

 

Exacto!