Ask Eric!

[ERICOPOLY]

I had closed the IWM short earlier in the year, and then put it back on at $117 a month ago.  The short is hedged with $130 strike call.  About 120% of account net asset value.  I also have a SPY short for 50% of account value that isn't hedged.  Then I have a lot of BAC common hedged with $15 strike 2016 puts and a few small energy positions.

 

What was your thinking behind closing your IWM short earlier in the year and how much to hedge the market in general?

 

Just emotions.  I don't really want to be in this game anymore and I can't sell what I own because if taxes.  So I am hedging.

 

I take it you all recognize that I liquidated my RothIRA early this year and turned it over to outside management.  It was up roughly 70% annualized over the prior 11 years.

 

Here is a clip that summarizes how I feel about how those 11 years came to pass:

 

And early this year I hit the 5:45 minute mark of that clip.

And just like that, my running days was over.

[frommi]

And just like that, my running days was over.

 

I can`t really express my respect for you, you rolled the dice big time 11 years long and knew when to stop.

Knowing when to stop is for me more impressive than your performance. Hats off!

[leadingusforward]

And just like that, my running days was over.

 

I can`t really express my respect for you, you rolled the dice big time 11 years long and knew when to stop.

Knowing when to stop is for me more impressive than your performance. Hats off!

 

+1

 

Completely agree on stopping being most impressive part of the 11 years despite the great track record.  Most would want even more money, think they were invincible or both.  It takes a lot of humility and self-knowledge to stop running.

[writser]

Hah, I utterly disagree. Multiplying your portfolio by a factor 300 in a decennium is the hard thing. If I achieve that I would have no difficulties at all letting somebody else manage 95% of my net worth (or 99%, or 50%, or 20%). Still some play money left.

[ERICOPOLY]

Hah, I utterly disagree. Multiplying your portfolio by a factor 300 in a decennium is the hard thing. If I achieve that I would have no difficulties at all letting somebody else manage 95% of my net worth (or 99%, or 50%, or 20%). Still some play money left.

 

That's how I look at it. 

 

And I'm not like Buffett who goes around saying he can make 50% a year.  I believe very firmly that I can't and I don't really know how the hell this happened.  I believe Buffett could, but I'm no Buffett.

 

Here's a bumper sticker for you:

When fortune smiles on you, put a ring on it's finger.

[tede02]

Eric, curious if you've ever bought options on the S&P for example just as a downside hedge against a broad sell-off?  Any experience here?

 

Thanks,

 

Ted

[krazeenyc]

Eric do you know where the best resource is regarding understanding the intricacies of various constructive sales rules?

[ERICOPOLY]

Eric do you know where the best resource is regarding understanding the intricacies of various constructive sales rules?

 

No.  Best I can guess is that if BAC is trading at $17 it is almost certainly a constructive sale if you write a $12 call and purchase a $12 put.

 

But most likely not (in my opinion) if you instead write a $22 call and buy the $12 put.

 

There is all this gray area in between.

[leadingusforward]

Eric -

 

I know you have a variety of considerations for your current portfolio such as taxes and restricted funds.  If you were starting fresh with all cash, what percentage of your portfolio would you invest in GM? 

 

Thanks.

[orthopa]

Eric-

 

Care to comment on the AIG warrants at this time? Do you still own them? Im still early reading/comprehending the cost of leverage thread and I see you owned them a couple of years ago. I'm still learning and understanding your definition of cost of leverage and was wondering where does AIG stand?

 

I have held the BAC warrants for a couple years and seemed to have made a short term opportunity mistake as you have displayed. Just want to see your opinion in regard to the AIG warrants.

 

Thanks.

[JBird]

Eric, what makes you so rational? Are there any notable formative experiences or ideas that have made you intellectually into who you are today?

[muscleman]

I wonder if you have ever used options to play mergers?

Right now CHTR is proposing to acquire TWC and give $100 and 0.54 CHTR share for each TWC share. This means each TWC share will receive an equivalent of $195. Will this be a good time to consider buying TWC call options? Which strike and length would you consider?

[ERICOPOLY]

Eric, what makes you so rational? Are there any notable formative experiences or ideas that have made you intellectually into who you are today?

 

You posted this when I was on vacation so I missed it.

 

I've done plenty of irrational things.  Hopefully on balance I'm rational enough.

 

I found out recently that my paternal great-grandmother's brother-in-law was this man:

https://en.wikipedia.org/wiki/Hans_Reichsfreiherr_von_Boineburg-Lengsfeld

 

He was my grandfather's "Uncle Hans".

 

Now, if you Google "Boineburg conspirator" you'll learn that he was the man that rounded up the Gestapo and SS in Paris during Valkyrie... and then had to let them go again when Hitler survived the attempt.

 

He's pretty much the only conspirator (that I can find) that lived (the others were executed).  There must be some streak of luck to that.

 

So, you know, am I rational to really care about this any more than the next person?  It's a fairly distant relation, so it's a bit silly.  But it's still fun to think about how close you are to historical events... not everyone's grandfather's uncle was in on the plot to assassinate Hitler.  That was a pretty cool find even if it's useless.

 

 

[ERICOPOLY]

I wonder if you have ever used options to play mergers?

Right now CHTR is proposing to acquire TWC and give $100 and 0.54 CHTR share for each TWC share. This means each TWC share will receive an equivalent of $195. Will this be a good time to consider buying TWC call options? Which strike and length would you consider?

 

Not me, but somebody else on here can likely answer it.

[boilermaker75]

I wonder if you have ever used options to play mergers?

Right now CHTR is proposing to acquire TWC and give $100 and 0.54 CHTR share for each TWC share. This means each TWC share will receive an equivalent of $195. Will this be a good time to consider buying TWC call options? Which strike and length would you consider?

 

Not me, but somebody else on here can likely answer it.

 

I often play options with mergers, but I don't buy calls I sell puts. That way I set the date when the trade is over. For instance, you could write the July 17 180-strike puts for >$2 a share. If you get put to write the August 21  $180-strike calls, if not write the July 17 $180-strike puts. Repeat each month. Most recently I did this with DTV.

[ERICOPOLY]

I just realized something today that there are similarities with investing and what I did for a paycheck at Microsoft.

 

I worked on the Internet Explorer team as a "software test engineer" and I joined them in 1997 while they were still working on the IE4 Beta 2 milestone.  At first I didn't really know jack shit and it took me a while to find out how I was going to remain gainfully employed.  I wasn't assigned to a specific feature, I was initially just on a team of people that helped investigate reports coming in from participants in the public beta program (preliminary investigation of the bugs that they reported).  The thing that I eventually gravitated to was just ad-hoc testing of Internet Explorer to find way to make it either crash or hang.  Then I got adopted by the manager of their stress team and I formally just became somebody who was interested in stress testing the product until it crashed.

 

I had a massive bug count of crashes, and I did so with what I've now come to understand as the "cockroach theory".  I would pound heavily on an area of code where a crash was found and I'd find many more.  The bad cook in the kitchen was either the developer, or the tester who was formally assigned to test his code, or just that it was a poorly architected or just very complex area of code.  In any case, once the first cockroach was found I would pound on it and find many more.  Sometimes I would just go right to the source code and just pick them out one by one.  I mean, it was really fun for a while.

 

So... enough about that...

 

This latest Valeant thing is the first time I've put any connection between that and security analysis.  Somebody finds something odd in a lack of disclosure and if you really stop to think about that... why would any management ever have a good motivation to look like they are trying to hide anything?  Because shareholders are like girlfriends and anytime you act in a way that is the least bit suspicious and try to hide it, they'll get really concerned really fast.  So why would you ever act suspicious and refuse shareholders requests for better disclosure when you basically know that your girlfriend is just going to hit the ceiling if you do that?

 

So I am starting to get the point here and I'm quite a bit more interested now in the value of reading 10-Ks.  It can have the same kind of fun attached to it that I had as a stress tester.  My question though -- how would I go about getting started with an education in this field if I wanted to pursue it as a formal career?  I have been a bit bored.

 

[Rainforesthiker]

Maybe Bill Ackman will hire you to smell out rats in 10-ks.

[Orchard]

I would say that's what the Jim Chanos / Bronte Capital's of the world do. I think this all started with a report on revenue recognition at Endo in Grant's (alerted to by Chanos) and soon after Hempton / Bronte found a few red flags at Valeant. Both assumed (I think) that if there's one red flag, there will be more and they kept on digging. Bronte kept posting his findings until the Philador find, together with Citron really moved the market.

 

Also there's Francine McKenna at re:the Auditors who posts about 10K issues. http://retheauditors.com

 

[Orchard]

I would also add that the short sellers look for situations where the girlfriend is especially trustworthy - Straight Path trading at a huge multiple of revenue, GlobalStar the same, Valeant at a good multiple of pro forma adjusted cash eps. They essentially go out looking for red flags to completely undermine the trust that's present at the time and get investors to go back to looking at GAAP.

[Gamecock-YT]

I would say that's what the Jim Chanos / Bronte Capital's of the world do. I think this all started with a report on revenue recognition at Endo in Grant's (alerted to by Chanos) and soon after Hempton / Bronte found a few red flags at Valeant. Both assumed (I think) that if there's one red flag, there will be more and they kept on digging. Bronte kept posting his findings until the Philador find, together with Citron really moved the market.

 

Also there's Francine McKenna at re:the Auditors who posts about 10K issues. http://retheauditors.com

 

footnoted.com is another interesting site.

[sswan11]

So I am starting to get the point here and I'm quite a bit more interested now in the value of reading 10-Ks.  It can have the same kind of fun attached to it that I had as a stress tester.  My question though -- how would I go about getting started with an education in this field if I wanted to pursue it as a formal career?  I have been a bit bored.

 

How about doing the CFA (Chartered Financial Analyst) exam?  Its self paced with 3 exams and it an excellent qualification for securities analysis work.

[Cardboard]

Hi Ericopoly,

 

This book would be a good start IMO:

 

http://www.google.ca/url?sa=t&source=web&cd=1&ved=0CAoQFjAAahUKEwjJ6fj59-7IAhVE9x4KHUgHAdw&url=http%3A%2F%2Fwww.amazon.com%2FFinancial-Shenanigans-Accounting-Gimmicks-Reports%2Fdp%2F0071703071&usg=AFQjCNGjeKLLMGuADJdQc4VRrLZuYVKn7w

 

Cardboard

[stahleyp]

Eric,

 

Please start up your own firm.  ;)

[james22]

Hi Ericopoly,

 

This book would be a good start IMO:

 

http://www.google.ca/url?sa=t&source=web&cd=1&ved=0CAoQFjAAahUKEwjJ6fj59-7IAhVE9x4KHUgHAdw&url=http%3A%2F%2Fwww.amazon.com%2FFinancial-Shenanigans-Accounting-Gimmicks-Reports%2Fdp%2F0071703071&usg=AFQjCNGjeKLLMGuADJdQc4VRrLZuYVKn7w

 

Cardboard

 

Looks interesting, thanks.

[ERICOPOLY]

Good suggestions, thanks all.

 

One "small world" anecdote from that Microsoft job is that I met a great guy from Canada (Hamilton, Ontario) working there on the stress team alongside me in 1998 and for several years after that.  He was hired in 1998 (or 1999).  When I quit the company roughly 10 years after meeting him, he was surprised and I told him about the FFH options.  He had personally met Prem!  It turns out that the year before we hired him, he had interned for Northbridge and helped them write some underwriting code.  Isn't that crazy?  What are the chances.  Up until that point I had no idea he worked there.