Ask Eric!

[Liberty]

Hi Eric,

 

Thank you for being so generous with your ideas with the board.

 

I was curious to know what you think of AIG. I know you used to own it a little while ago, but you seem to have stopped posting about it and I was wondering if you had stopped following it, and if so why. Did it get too expensive for you? Is it too unpredictable compared to BAC so might as well put it all in BAC? Did you see something you didn't like in management? Something else?

 

Thanks.

[ERICOPOLY]

Hi Eric,

 

Thank you for being so generous with your ideas with the board.

 

I was curious to know what you think of AIG. I know you used to own it a little while ago, but you seem to have stopped posting about it and I was wondering if you had stopped following it, and if so why. Did it get too expensive for you? Is it too unpredictable compared to BAC so might as well put it all in BAC? Did you see something you didn't like in management? Something else?

 

Thanks

 

I'm finding what I need in BAC.  It just clicks.

[Mephistopheles]

Hi Eric,

 

Thank you for being so generous with your ideas with the board.

 

I was curious to know what you think of AIG. I know you used to own it a little while ago, but you seem to have stopped posting about it and I was wondering if you had stopped following it, and if so why. Did it get too expensive for you? Is it too unpredictable compared to BAC so might as well put it all in BAC? Did you see something you didn't like in management? Something else?

 

Thanks

 

I'm finding what I need in BAC.  It just clicks.

 

Eric, why are you 100% (or highly) hedged in BAC and willing to pay the interest on your margin account? If you are so confident about the prospects, why not just buy without hedging, and use the freed up capital elsewhere?

[ERICOPOLY]

Hi Eric,

 

Thank you for being so generous with your ideas with the board.

 

I was curious to know what you think of AIG. I know you used to own it a little while ago, but you seem to have stopped posting about it and I was wondering if you had stopped following it, and if so why. Did it get too expensive for you? Is it too unpredictable compared to BAC so might as well put it all in BAC? Did you see something you didn't like in management? Something else?

 

Thanks

 

I'm finding what I need in BAC.  It just clicks.

 

Eric, why are you 100% (or highly) hedged in BAC and willing to pay the interest on your margin account? If you are so confident about the prospects, why not just buy without hedging, and use the freed up capital elsewhere?

 

The hedging is to protect the margin loan -- making it effectively non-recourse debt on the day that the leverage was put on.

 

It's a bit like asking someone why they would own a warrant if they were confident -- the warrant is leverage with an embedded hedge that makes in non-recourse leverage.

[LC]

So the margin interest + cost of the put is the total cost of that leverage?

[ERICOPOLY]

So the margin interest + cost of the put is the total cost of that leverage?

 

Yes.

[frommi]

When to you plan to sell BAC?  ;D

[ERICOPOLY]

When to you plan to sell BAC?  ;D

 

At the top  :D

[deadspace]

Hi Eric

 

What do you think of a situation like the preferred shares of Fannie and Freddie.  Certainly fit the model of great business which is being affected by a single external factor  trading at an extremely depressed price.  This situation has been successful for me in other investments like USG.  What are your thoughts on this?

[Mephistopheles]

Hi Eric,

 

Thank you for being so generous with your ideas with the board.

 

I was curious to know what you think of AIG. I know you used to own it a little while ago, but you seem to have stopped posting about it and I was wondering if you had stopped following it, and if so why. Did it get too expensive for you? Is it too unpredictable compared to BAC so might as well put it all in BAC? Did you see something you didn't like in management? Something else?

 

Thanks

 

I'm finding what I need in BAC.  It just clicks.

 

Eric, why are you 100% (or highly) hedged in BAC and willing to pay the interest on your margin account? If you are so confident about the prospects, why not just buy without hedging, and use the freed up capital elsewhere?

 

The hedging is to protect the margin loan -- making it effectively non-recourse debt on the day that the leverage was put on.

 

It's a bit like asking someone why they would own a warrant if they were confident -- the warrant is leverage with an embedded hedge that makes in non-recourse leverage.

 

But you're hedging everything, not just what you bought on margin, right? Like if you own 300 shares, 100 of them bought on margin, then you would only need 1 put contract to hedge the loan. So I'm wondering why are you hedging everything?

 

The reason for warrants or options (at least for me) is so I can save capital to use elsewhere.

[ERICOPOLY]

Hi Eric,

 

Thank you for being so generous with your ideas with the board.

 

I was curious to know what you think of AIG. I know you used to own it a little while ago, but you seem to have stopped posting about it and I was wondering if you had stopped following it, and if so why. Did it get too expensive for you? Is it too unpredictable compared to BAC so might as well put it all in BAC? Did you see something you didn't like in management? Something else?

 

Thanks

 

I'm finding what I need in BAC.  It just clicks.

 

Eric, why are you 100% (or highly) hedged in BAC and willing to pay the interest on your margin account? If you are so confident about the prospects, why not just buy without hedging, and use the freed up capital elsewhere?

 

The hedging is to protect the margin loan -- making it effectively non-recourse debt on the day that the leverage was put on.

 

It's a bit like asking someone why they would own a warrant if they were confident -- the warrant is leverage with an embedded hedge that makes in non-recourse leverage.

 

But you're hedging everything, not just what you bought on margin, right? Like if you own 300 shares, 100 of them bought on margin, then you would only need 1 put contract to hedge the loan. So I'm wondering why are you hedging everything?

 

The reason for warrants or options (at least for me) is so I can save capital to use elsewhere.

 

I have puts that protect my margin loan -- they were at-the-money when purchased.  I have puts (further out of the money) that protect a given level of net worth -- I'm effectively retired and need to have a set level of guaranteed accessible liquidity.  Today I had Nov BAC puts expire with $7 strike and $11 strike.  People talk about how they are in cash because the market could drop 90% like it did in the Depression, blah dee blah dee blah blah blah.  They just need to buy insurance for that and shut up -- would they never be homeowners if they constantly worried about a guy who's house once burned down, or would they just buy insurance and go ahead with the home purchase after all? 

 

 

[ERICOPOLY]

Hi Eric

 

What do you think of a situation like the preferred shares of Fannie and Freddie.  Certainly fit the model of great business which is being affected by a single external factor  trading at an extremely depressed price.  This situation has been successful for me in other investments like USG.  What are your thoughts on this?

 

I haven't made an effort to educate myself on this.  I'm just coasting on the BAC idea and I want to offload much of the management of my money to others once BAC works out.  I actually endure a great deal of stress over all this stuff and I just want to put it behind me rather than spending another decade like this.

[Mephistopheles]

Hi Eric

 

What do you think of a situation like the preferred shares of Fannie and Freddie.  Certainly fit the model of great business which is being affected by a single external factor  trading at an extremely depressed price.  This situation has been successful for me in other investments like USG.  What are your thoughts on this?

 

I haven't made an effort to educate myself on this.  I'm just coasting on the BAC idea and I want to offload much of the management of my money to others once BAC works out.  I actually endure a great deal of stress over all this stuff and I just want to put it behind me rather than spending another decade like this.

 

I bet 10 years from now you will still be in the game. Especially if another huge (and obvious) opportunity like BAC comes around. It's stressful, but opportunities like that is what makes it fun. And you are too good of an investor to let them pass by! :D

[tripleoptician]

I'm interested in how an investor with such an incredible track record would go about selecting alternate management of his own money? Would it be partial or full transfer? Who would you select and would you diversify to a few different managers?

I fully understand the stress component, but I would guess you would always be questioning what they are doing if it isn't your style (yours in pretty unique!) or that you would be doing much better by yourself.

[ERICOPOLY]

I'm interested in how an investor with such an incredible track record would go about selecting alternate management of his own money? Would it be partial or full transfer? Who would you select and would you diversify to a few different managers?

I fully understand the stress component, but I would guess you would always be questioning what they are doing if it isn't your style (yours in pretty unique!) or that you would be doing much better by yourself.

 

Yes but I can blame them when the investments don't go up.  That's the benefit of the Fairfax shareholders -- they can just blame Prem for hedging when the market goes up and they miss out on the rally (even though they knew for a long time that he was hedging).  Prem is providing a service to them which is protecting themselves from self-loathing, they just don't quite see it that way.

[skanjete]

Eric,

 

I can't really understand why you would expose yourself to stress anymore. With such a track record, you should be financially independent by now. Wealthy enough to cover your expenses for the rest of your life.

 

Suppose you need a sum X to cover your expenses for the rest of your life. Why would you risk that sum to get even richer, if it isn't really needed to maintain your standard of living and risking it gives you a great deal of stress?

 

You could invest and risk anything above sum X, but that shouldn't stress you, because losing it wouldn't be threatening to your standard of living. It would be annoying of course, but not really stressful.

 

For me, the only thing really stressful is managing others people's money, because they indeed can blame you if they enter the partnership with the wrong set of expectations. Besides, as a money manager, you enter a rat race against other managers, and you're constantly being compared, and mostly on a faulty set of parameters (the only correct parameter is the return you get for the risk you assumed, but the risk part is something most people can't understand).

 

Managing my own money gives me no stress at all, not even in 2008 because I knew I couldn't be sunk (I don't employ leverage)  and I had time to sit it out. Employing leverage could make me richer at a much faster pace, but what's the use if the extra capital wouldn't change a thing to my standard of living and using leverage could cause me stressful nights?

[mysticdrew]

Hi Eric

 

What do you think of a situation like the preferred shares of Fannie and Freddie.  Certainly fit the model of great business which is being affected by a single external factor  trading at an extremely depressed price.  This situation has been successful for me in other investments like USG.  What are your thoughts on this?

 

I haven't made an effort to educate myself on this.  I'm just coasting on the BAC idea and I want to offload much of the management of my money to others once BAC works out.  I actually endure a great deal of stress over all this stuff and I just want to put it behind me rather than spending another decade like this.

 

So does that mean we'll be losing your valuable guidance here in a couple years?

[kmukul]

Hi Eric,

You are the reason me and may be other people like me are on the his board, Buffet and Bruce and other people are sort of legends and do full time investing they are sort of like mythological figures to me. However you started with a job and full baggage of that without finance background etc. I think that's a truly unbelievable achievement and also inspires me to manage my own money. I think you will not find someone as smart as you to manage your money but I guess you may not care. you can always put into Berkshire :) if you so desire. Anyways thanks a lot Eric its truly a great honor to learn and interact with you.

[T-bone1]

I'm interested in how an investor with such an incredible track record would go about selecting alternate management of his own money? Would it be partial or full transfer? Who would you select and would you diversify to a few different managers?

I fully understand the stress component, but I would guess you would always be questioning what they are doing if it isn't your style (yours in pretty unique!) or that you would be doing much better by yourself.

 

Yes but I can blame them when the investments don't go up.  That's the benefit of the Fairfax shareholders -- they can just blame Prem for hedging when the market goes up and they miss out on the rally (even though they knew for a long time that he was hedging).  Prem is providing a service to them which is protecting themselves from self-loathing, they just don't quite see it that way.

 

+1

[kmukul]

Hi Eric,

If you had new money coming in (or no tax hit on selling) will you still buy BAC instead of WFC or something else? its not super cheap any more

 

Thanks a lot

 

[ERICOPOLY]

I would still buy BAC.  They are now generating $2 a share (with DTA help) and priced at $16.

 

That's a 12.5% yield.  Then you have capital gains as the shares approach a reasonable P/E multiple on those earnings.

 

So it should be 20% a year for the next few years -- or instead perhaps a bigger pop up front (which is what I'd prefer).

 

Keep in mind I don't have a lot of stocks that I know much about, so others will have better and more numerous places to put money.

 

[muscleman]

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

[ERICOPOLY]

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

[merkhet]

 

 

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

 

Out of curiosity, what goes through your mind when you're down 50%? How do you deal with the psychological stress that it causes?

[ERICOPOLY]

 

 

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

 

Out of curiosity, what goes through your mind when you're down 50%? How do you deal with the psychological stress that it causes?

 

Well, it's probably the same as with everyone else -- you wish you had done something else differently, but you are stuck with the cards you are holding and you don't have much choice but to stay in the game at that point.  It sucked every time.