Below you’ll find a link to my most recent and comprehensive research report on Assured Guaranty (AGO). As most of you are aware, we’ve taken advantage of the recent dip to substantially increase our position size for those that have free cash. In addition, we also have sold puts throughout the year and the last 5 years for that matter. Because the stock has been volatile, prices on the options are quite high. This is one of the extremely interesting things about options and is a huge reason why we sell them. Volatility is a huge component of price with options, so stocks that move up or down with veracity, tend to have more expensive options. While short-term market participants and economic academia define volatility as being equal to risk, they are just flat wrong when it comes to long-term investing. This misconception is what has allowed value investors such as Warren Buffett, Bruce Berkowitz and Benjamin Graham to outperform over many decades.
I view AGO as an extremely low risk investment, as the company has a stellar balance sheet, $400MM a year in investment income and it trades at about 50% of its conservatively estimated long-term liquidation value. In addition, the company will benefit when interest rates rise but would also be fine if they stay low. Almost all of our AGO options expire by January 2016 and have annualized returns over 20% from current prices. Our worst case scenario is being put the stock and owning it for the eventual upswing. I cannot explain enough that there aren’t a great deal of opportunities in this market. Many well-respected and so-called “safe” investments such as Apple and Disney have seen price drops of 10-15% of late from their recent highs. Many of these companies still don’t offer a significant margin of safety. Warren Buffett today on CNBC mentioned that he couldn’t justify investing in many of the Consumer Staples companies at current prices. This is exactly why when we have truly great investment opportunities where we can’t imagine a way that we would lose long-term, we’ve got to be aggressive with them. The cost for this, is your portfolio will be more volatile from time to time. We will get a much better feel for things as our options expire in January and historically, we’ve seen substantial gains towards the end of the year, as options really begin lowering in price as they get nearer to expiration. We are 100% committed to providing the best long-term risk adjusted returns that we can and I can assure you that my family and my own personal money is invested in the same positions. We’ve got a bright future as these various positions play out but the biggest hurdle is just having the patience and discipline to let things play out. If you can master that and I’ll do everything I can to assist, I’m confident our accounts will be considerably higher as we move forward. I’d encourage you to read the report and if you have any questions, please don’t hesitate to contact me!