The SuperInvestors of Corner of Berkshire & Fairfax!

[alwaysinvert]

alwaysinvert,

 

I exited Sears 7 years ago, not recently.

 

Part2:

 

Conviction is an evolutionary thing.  I didn't start out with 1/3 of my assets in BAC.  My maximum number of shares was probably reached last fall.

Sorry, I misread.

 

Your point about conviction being evolutionary is right, I think. But what bothers me is that I never seem to have the kind of epiphanies/insights that some of you guys do. It's always sort of more fluid. I tend to think of it as me getting paid to take on some measure of risk that the market hates (like in my latest buy Posco, we will have to see how that works out long-term) rather than being able to spot lopsided bets by being better at interpreting the information at hand, like some did recently with MBIA. Many of you here win because you are smarter and more patient than the market, while I win* only because I'm more patient.

 

Maybe that is just due to relative experience, but I kind of suspect that there are only a very select few who can earn truly superstar returns over a couple of cycles, and I am not one of them.

 

*That's up in the air since I have only been in the markets since the middle of '08.

[locatevalue]

So if a book is put out, how many people flood in here?

 

We won't let them in.  They can lurk!  ;D  Cheers!

 

Thats a fair point.  On the other hand:

 

I have held BAC for 3 years continuously now, buying on each dip, and reducing into rallies. 

 

I have rebought over and over AT ever increasing prices, as the thesis improved. 

 

How many have the stomach for that? 

 

This game is far more psychological and behavioural than analytical.  Anyone can learn to read a balance sheet and understand enough accounting to get average returns.  To some extent one can learn how to be smartly contrarian.  However, I dont believe that one can learn how to comfortably go against the crowd, as an adult, for long periods of time.  That includes the crowd on this board.

 

Take SHLD: I owned it about 7 years ago for awhile, knew the balance sheet, the real estate thesis, the brand thesis etc.  I gratefully exited it AT A LOSS.  Since then via this board I have followed it closely.  I completely understand the thesis, still.  But I dont agree with it.  What I see is a retailer that is horrendously run that may or may not be able to liquify its real estate fast enough to keep up with the hemoraging retail operation.  Bruce B. and others see something different.  But only I will be able to change my mind.

 

Same with Apple.  MBIA I have never understood.  I no longer do oil and nat. gas, or commodity based products, normally. 

 

I am certainly not immune to outside influence.  I have to actively avoid outside effects at times.  Ie. I have deilberately skipped the FFh AGM for two years now to avoid having Prem as a larger part of my head than he already is.  I know his thoughts on deflation, market valuations etc.  I respect him a great deal.  I just dont need his thoughts becoming mine.  The other thing I avoid is business TV, and online video.  When I used to watch alot of business TV I was forever buying and selling, different securities, because ideas would get into my head.  Not any longer.  In the past 12 months I have bought exactly one new stock: AIG.  I trade alot, but like Eric, it is around 5 at most stocks, at any given time. 

 

Finally, there are board members here who know more about certain things than I do which has been of great help to me.  Quite a number actually.

 

 

 

Al, I agree this game is more of psychological and behavioural than analytical, My portfolio is similar to yours around/less than 5 stcoks only exception is 2009 with around 7 to 9  stocks as i can see more bargains. The only thing i dont do is trading in and out of the same stock for some reason i am not comfortable doing that, I only buy when i am convinced of it can become major part of investment and if its good like BAC i sometimes take up 50% which currently is(50% is kind of exception i dont see me repeating it that often), I kind of let it ride till it reach IV but till then i dont trade.

Have you tried to seperate out gains from Trade to underlying buy and hold and compared the results. The reason i am asking is i would like add this to my arsenal as i grow my AUM my current salary will not be able to offset any down cycles like 2009, 2011(bad year for me) to start using other funds to buy bargained shares.So, I need to find an approach to keep cash cushion like you doing. Currently i am keeping aside around 20% to 30% as cash cushion and working on arbittrage ideas but sometimes its very hard to find good one and your idea of trading in the same stock that you undervalues makesense to me. So any details on your current performance of this trading in BAC/AIG in and our will be helpful for me

[Uccmal]

"Have you tried to seperate out gains from Trade to underlying buy and hold and compared the results. The reason i am asking is i would like add this to my arsenal as i grow my AUM my current salary will not be able to offset any down cycles like 2009, 2011(bad year for me) to start using other funds to buy bargained shares.So, I need to find an approach to keep cash cushion like you doing. Currently i am keeping aside around 20% to 30% as cash cushion and working on arbittrage ideas but sometimes its very hard to find good one and your idea of trading in the same stock that you undervalues makesense to me. So any details on your current performance of this trading in BAC/AIG in and our will be helpful for me"

 

From 1997 to 2003 doing buy and hold, for the most part, my returns were low.  I got introduced to Leaps by the board members here, specifically Original Mungerville. 

 

Generally what I do is trade in and out of Leaps from 1-40% of a total position depending on whats going on.  The best way to describe it is with AIG.  When the common price was in the low 30s and below, I bought some 2014 Leaps with 27 and 30 dollar, up to 40$ strikes.  As the price rose I sold off the higher strikes and kept some of the ones deep in the money (still have some).  Fast forward to 2015 leaps.  I bought A bunch of 42s (I think), and a large number of 40s during recent dips.  I have since unloaded the 42s at something better than break even and sold down  a few of the 40s.  I sell highest to lowest strike, normally, to keep the tax man distant.  With the warrants I expanded the position during downtimes and have taken some profits but still hold a sizable position. 

 

Two things come to mind that I am willing to do that other investors dont.  One is buying Leaps when the stock price is higher than when I may have sold them before, providing the underlying story has improved.  The other is taking a loss on Leaps again going high to low strike.  The loss an be due to time decay.  In aggregate the gains far outweigh the losses.  I use different time and strikes to separate losing transactions out so that the securities are: "substantially different".

 

I generally dont bother trading in and out of common holdings.  It just isn't worthwhile.  The total portion of my holdings subject to churn is likely around 30%.  Call it opportunistic buy and hold. 

 

 

[locatevalue]

"Have you tried to seperate out gains from Trade to underlying buy and hold and compared the results. The reason i am asking is i would like add this to my arsenal as i grow my AUM my current salary will not be able to offset any down cycles like 2009, 2011(bad year for me) to start using other funds to buy bargained shares.So, I need to find an approach to keep cash cushion like you doing. Currently i am keeping aside around 20% to 30% as cash cushion and working on arbittrage ideas but sometimes its very hard to find good one and your idea of trading in the same stock that you undervalues makesense to me. So any details on your current performance of this trading in BAC/AIG in and our will be helpful for me"

 

From 1997 to 2003 doing buy and hold, for the most part, my returns were low.  I got introduced to Leaps by the board members here, specifically Original Mungerville. 

 

Generally what I do is trade in and out of Leaps from 1-40% of a total position depending on whats going on.  The best way to describe it is with AIG.  When the common price was in the low 30s and below, I bought some 2014 Leaps with 27 and 30 dollar, up to 40$ strikes.  As the price rose I sold off the higher strikes and kept some of the ones deep in the money (still have some).  Fast forward to 2015 leaps.  I bought A bunch of 42s (I think), and a large number of 40s during recent dips.  I have since unloaded the 42s at something better than break even and sold down  a few of the 40s.  I sell highest to lowest strike, normally, to keep the tax man distant.  With the warrants I expanded the position during downtimes and have taken some profits but still hold a sizable position. 

 

Two things come to mind that I am willing to do that other investors dont.  One is buying Leaps when the stock price is higher than when I may have sold them before, providing the underlying story has improved.  The other is taking a loss on Leaps again going high to low strike.  The loss an be due to time decay.  In aggregate the gains far outweigh the losses.  I use different time and strikes to separate losing transactions out so that the securities are: "substantially different".

 

I generally dont bother trading in and out of common holdings.  It just isn't worthwhile.  The total portion of my holdings subject to churn is likely around 30%.  Call it opportunistic buy and hold.

 

 

Al, thanks this is really helpful. I am not good at handling leaps so far,was scared of loosing money due to time decay, just loss aversion! I read Greenbalt book year back and never had courage to do it. But seeing you and Eric doing it gives some confidence at least made me think differently. Going forward planning to take some leap positions along with common on high conviction ideas. I hope one day I can do these things as opportunistics as you guys do!

[SharperDingaan]

"Have you tried to separate out gains from Trade to underlying buy and hold and compared the results."

 

We did exactly this, a number of years ago. In most cases gains attributable to synthetic hedging were a quantifiable 15-60% of the realized return, but very situational. However, the real value was not quantifiable; it was the resilience from opportunity loss avoided - that ability to stick with the concentrated & leveraged position, which would otherwise have given you a 50% capital loss.

 

We deliberately try NOT to meet our fellow board members, & it is exactly because of the group think liability that others have already expressed. The reality is that value investing is a small community, & given our typically institutional approach, that pool is even smaller. I suspect that I might also see one or two of the board members routinely commuting every week on the Go Train. Nothing anti-social!

 

We deliberately avoid options & LEAPS, primarily because of a bad illiquidity experience with a deep in-the-money LEAP; an experience we will not allow to reoccur. We also find that much of what we could do with options we could also do with leverage and synthetic shorting; but it is feasible, only because we are not institutional.

 

We’re still working on cost base measurement; a problem that only seems to occur if you use synthetic shorts. An accurate share position with a negative cost base, is as useless as a 1 share position with an accurate cost base. 

 

SD

[augustabound]

 

I suspect that I might also see one or two of the board members routinely commuting every week on the Go Train. Nothing anti-social!

 

 

I knew I recognized your profile picture from the train home to Newmarket.  ;D

[valuecfa]

So if a book is put out, how many people flood in here?

 

We won't let them in.  They can lurk!  ;D  Cheers!

 

Thats a fair point.  On the other hand:

 

I have held BAC for 3 years continuously now, buying on each dip, and reducing into rallies. 

 

I have rebought over and over AT ever increasing prices, as the thesis improved. 

 

How many have the stomach for that? 

 

This game is far more psychological and behavioural than analytical.  Anyone can learn to read a balance sheet and understand enough accounting to get average returns.  To some extent one can learn how to be smartly contrarian.  However, I dont believe that one can learn how to comfortably go against the crowd, as an adult, for long periods of time.  That includes the crowd on this board.

 

Take SHLD: I owned it about 7 years ago for awhile, knew the balance sheet, the real estate thesis, the brand thesis etc.  I gratefully exited it AT A LOSS.  Since then via this board I have followed it closely.  I completely understand the thesis, still.  But I dont agree with it.  What I see is a retailer that is horrendously run that may or may not be able to liquify its real estate fast enough to keep up with the hemoraging retail operation.  Bruce B. and others see something different.  But only I will be able to change my mind.

 

Same with Apple.  MBIA I have never understood.  I no longer do oil and nat. gas, or commodity based products, normally. 

 

I am certainly not immune to outside influence.  I have to actively avoid outside effects at times.  Ie. I have deilberately skipped the FFh AGM for two years now to avoid having Prem as a larger part of my head than he already is.  I know his thoughts on deflation, market valuations etc.  I respect him a great deal.  I just dont need his thoughts becoming mine.  The other thing I avoid is business TV, and online video.  When I used to watch alot of business TV I was forever buying and selling, different securities, because ideas would get into my head.  Not any longer.  In the past 12 months I have bought exactly one new stock: AIG.  I trade alot, but like Eric, it is around 5 at most stocks, at any given time. 

 

Finally, there are board members here who know more about certain things than I do which has been of great help to me.  Quite a number actually.

 

Al, I agree this game is more of psychological and behavioural than analytical,

 

I think it is only the confidence in your own analytical work that makes you capable of having the psychological edge. If this is the case, i think you tend to more welcome volatility then shy away from it.

 

[valuecfa]

Put me on the list that hopes no book comes out. I like to chat with people here about ideas, but we are bound to start getting the Yahoo messenger crowd as it grows. As of now, i think there is enough quality information shared on here to make it worth my time...Hopefully, it will stay that way as it becomes more popular.

[augustabound]

Put me on the list that hopes no book comes out. I like to chat with people here about ideas, but we are bound to start getting the Yahoo messenger crowd as it grows. As of now, i think there is enough quality information shared on here to make it worth my time...Hopefully, it will stay that way as it becomes more popular.

 

I don't think Sanj would let the Yahoo garbage happen here.

[Packer16]

Sanjeev,

 

Is there an way to correlate comments on this board for a particular stock to a price graph of that stock?  I think it would be interesting to see how comments have correlated to then and future performance.  This in essence would be a like an aggregated investment diary for each stock.  Thx.

 

Packer

[nodnub]

We deliberately avoid options & LEAPS, primarily because of a bad illiquidity experience with a deep in-the-money LEAP; an experience we will not allow to reoccur.

SD

Hi Sharper,

 

Can you share some details of that situation?  I'm trying to better understand the risks. 

Cheers!

[infinitee00]

We deliberately avoid options & LEAPS, primarily because of a bad illiquidity experience with a deep in-the-money LEAP; an experience we will not allow to reoccur.

SD

Hi Sharper,

 

Can you share some details of that situation?  I'm trying to better understand the risks. 

Cheers!

 

I am curious about this too..Can you please share the details ?

[SharperDingaan]

We learned the hard way that you do not have to buy back a deep-in-the-money call; you could simply buy the underlying stock in on margin - & deliver the long position on the maturity date of the LEAP. In practical terms, a rational investor will pay no more than 30% of the current stock price; anything more & its cheaper to just buy the stock on margin. While the theoretical value of the LEAP may be well above this 30%, the LEAP is simply not going to see the bid.

 

A LEAP is not marginable. Your brilliant investment offers zero practical benefit until it matures, & is settled in stock; & that could be a very long time from now, & only after all the attendant risk. You can of course short the underlying stock any time you chose - & pay a borrow cost to use your own money!

 

We were trapped for 2 years in a Methanex LEAP that eventually settled at roughly 2.5x what we paid for it. At one point it was almost 6x; & cost us well over 300K in opportunity cost. We're older & wiser today,  but it was an expensive lesson we're not about to repeat.

 

SD

   

 

 

[frog03]

Sanjeev, are you still planning for your book to come out sometime in 2015?  Inquiring minds want to know!

[ItsAValueTrap]

A LEAP is not marginable. Your brilliant investment offers zero practical benefit until it matures, & is settled in stock

 

If you own options with American-style exercise, you can exercise them early.  Sometimes it may be obvious that you want to exercise them early:

A- If the stock pays dividends, it can make sense to exercise the options early if the option is substantially in-the-money.

B- If the borrow fee on the stock is very high.  The interest you would receive can be thought of as dividends.

C- If there is counterparty risk you may want to exercise early.  This probably doesn't apply to exchange-cleared options as counterparty risk is very low.

 

 

[LC]

Shouldn't the dividend & the cost to borrow both be already priced into the option price? IIRC it's almost always better to simply sell the option vs. exercise.