Author Topic: Fairfax Letter March 2014  (Read 47835 times)

ERICOPOLY

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 7081
Re: Fairfax Letter March 2014
« Reply #120 on: March 12, 2014, 10:07:55 PM »
The Russell 2000 has compounded at 7% annualized since the peak in 2007.

The world isn't scared!  Margin borrowing is at a peak -- seriously, it is. That isn't fear -- it's trumpets.


ERICOPOLY

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 7081
Re: Fairfax Letter March 2014
« Reply #121 on: March 12, 2014, 10:10:42 PM »
Shorting means to bet against the humans that are working for success in all these companies/countries, so you have a lot of headwinds.

Employees at companies are working for success.

What I'm doing is protecting myself from the presently heavily leveraged greedy humans that will get margin calls when their overvalued assets plunge a wee bit.

frommi

  • Hero Member
  • *****
  • Posts: 1215
Re: Fairfax Letter March 2014
« Reply #122 on: March 12, 2014, 11:06:08 PM »
This overvaluation can go away when the market just goes sideways. But you are far more successful than i am in investing, perhaps i should listen to you :).

wisdom

  • Hero Member
  • *****
  • Posts: 745
Re: Fairfax Letter March 2014
« Reply #123 on: March 12, 2014, 11:08:24 PM »

ERICOPOLY

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 7081
Re: Fairfax Letter March 2014
« Reply #124 on: March 12, 2014, 11:34:15 PM »
This overvaluation can go away when the market just goes sideways. But you are far more successful than i am in investing, perhaps i should listen to you :).

I am going to make a lot of money if the market doesn't crash and if BAC keeps heading higher.  But I've written $22 strike calls.  Used the proceeds to buy the IWM calls that hedge my IWM short.

Then all the BAC is hedged at $15 and $17 strike.  I've also written some SHLD puts.  I've closed out my C position and am contemplating the same for JPM. 

I believe that I won't lose much if anything if the markets merely stand still (I have decay from the puts I've written, the calls I've written, the dividends I expect to receive, and then there is decay on the calls I've purchased and the puts I've purchased.

But in short, I'm heavily leveraged on BAC to the upside, and heavily leveraged in Russell 2000 short for the downside.

I can accept either BAC trudging on, or total market wipeout.  Both are winners. 

I'm prepared for pretty much all comers.  My position is different from FFH because I've hedged against the Russell 2000 moving against me (using call options).  They've made no money in four years and I've made a killing (lucky perhaps).  If the market continues to march on, or at least if BAC does, I will still keep making terrific gains.

So, don't take my bearishness as a sign that I'm giving up all hope.  It's just that I'm taking it very seriously now whereas before I was brushing off the naysayers.
« Last Edit: March 12, 2014, 11:36:09 PM by ERICOPOLY »

JBird

  • Hero Member
  • *****
  • Posts: 527
Re: Fairfax Letter March 2014
« Reply #125 on: March 12, 2014, 11:47:13 PM »
So, don't take my bearishness as a sign that I'm giving up all hope.  It's just that I'm taking it very seriously now whereas before I was brushing off the naysayers.

Interesting. What changed your mind?
Woman and wine, games and deceit, make the wealth small and the wants great. - Ben Franklin

ERICOPOLY

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 7081
Re: Fairfax Letter March 2014
« Reply #126 on: March 13, 2014, 12:07:01 AM »
So, don't take my bearishness as a sign that I'm giving up all hope.  It's just that I'm taking it very seriously now whereas before I was brushing off the naysayers.

Interesting. What changed your mind?

I have a vague understanding that the astronomical increase in credit in China over the past few years (not just absolutely, but relative to their means) has been one of the horses pulling the cart (the global economy).  They create all that credit (money) and import things from all over the world. 

And look at a chart of increasing margin borrowing in the US and stock prices. 

There is like no room for bad surprises.  And the kind of bad surprise that can come out of China could very well be what tips Europe into deflation -- they are so close already.  Perhaps even the US.

Look at our profit margins... where does all that come from?  It's got to be hit pretty hard by something like decreasing demand for our exports from economies in Europe and China.

But anyways... I'm going to make about 75% gain over next two years if we muddle through and BAC goes to $22.  I'll probably do just as well, perhaps better, if Russell 2000 goes into Great Depression 2.0 mode.  So, I'll just eat popcorn and hope for the former (I don't want to live in a depressing time where we have widespread misery).

tombgrt

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1944
Re: Fairfax Letter March 2014
« Reply #127 on: March 13, 2014, 01:59:45 AM »
So, don't take my bearishness as a sign that I'm giving up all hope.  It's just that I'm taking it very seriously now whereas before I was brushing off the naysayers.

Interesting. What changed your mind?

I have a vague understanding that the astronomical increase in credit in China over the past few years (not just absolutely, but relative to their means) has been one of the horses pulling the cart (the global economy).  They create all that credit (money) and import things from all over the world. 

And look at a chart of increasing margin borrowing in the US and stock prices. 

There is like no room for bad surprises.  And the kind of bad surprise that can come out of China could very well be what tips Europe into deflation -- they are so close already.  Perhaps even the US.

Look at our profit margins... where does all that come from?  It's got to be hit pretty hard by something like decreasing demand for our exports from economies in Europe and China.

But anyways... I'm going to make about 75% gain over next two years if we muddle through and BAC goes to $22.  I'll probably do just as well, perhaps better, if Russell 2000 goes into Great Depression 2.0 mode.  So, I'll just eat popcorn and hope for the former (I don't want to live in a depressing time where we have widespread misery).


Isn't the increased margin borrowing running parallel with increased stock portfolio values? Obviously there is higher margin borrowing at peaks than at lows when looking at it percentage wise but I wonder how big a piece of the complete picture it is.

frommi

  • Hero Member
  • *****
  • Posts: 1215
Re: Fairfax Letter March 2014
« Reply #128 on: March 13, 2014, 02:44:34 AM »
So you lagged into a straddle on IWM? Thats absolut brilliant! What expiration date did you use?

thefatbaboon

  • Sr. Member
  • ****
  • Posts: 487
Re: Fairfax Letter March 2014
« Reply #129 on: March 13, 2014, 02:58:09 AM »
I just can't for the life of me figure out what would make interest rates go up.  >:( (USD, EUR, YEN).  Spikes, sure, I can see some reasons, but sustained increases….?

It's annoying.  I feel it's blinding me to potential downsides in the market.