Author Topic: Not the Opportunity of a Lifetime  (Read 5769 times)

arbitragr

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Re: Not the Opportunity of a Lifetime
« Reply #10 on: March 10, 2009, 04:00:28 PM »
puts should be good if markets stay at this level or up ...

looks like volatility is back again ... seems like markets are responding to good news ... people want to pick the bottom again ...
"worry top down, invest bottom up ..."


Mungerville

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Re: Not the Opportunity of a Lifetime
« Reply #11 on: March 10, 2009, 04:12:08 PM »
Buffet echoed my views that this is not 1974-type valuations or 1981 for that matter for the market overall.  Grantham also confirms it in his March 4 paper at www.gmo.com

This does not mean that the market can not rally big time here like plus 50% or that individual securities are cheap.  I think ORH right here is a no-brainer for example.

   



StubbleJumper

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Re: Not the Opportunity of a Lifetime
« Reply #12 on: March 10, 2009, 05:32:08 PM »
I just think a lot of people use Berkshire as an index replacement. There are a lot of people that have 100% of their net worth in Berkshire Hathaway and are old enough that rebuilding isn't going to be easy or possible. 

The put options make this not such a great idea anymore due to the total wipe out risk.  Losing X% on a wonderful bet is ok.  Losing everything on a wonderful bet isn't so smart (unless you are young and net worth is a low compared to future earnings)

What does the owner's manual say... they wont risk what they have for something they don't need?     In the past.... I couldn't think of an event that could sink the ship.  Now there is an event that could.  That is a big change.

-SFWUSC

This is an interesting perspective, and gives insight into why you might be a bit uncomfortable with the puts.  I would offer a few comments:

1) BRK is not and has never been an index replacement.  If people are thinking about it that way, it is a serious mistake.  I personally take concentrated positions in my portfolio, but I am completely comfortable with the idea that I could be wiped out (but ouch, that would be bad!).  Even with my tendency to take concentrated positions, it would be a really rare circumstance where I would ever consider "going all in" with 100% in a single security (I would never even go with 100% in a single currency).  If people go 100% into BRK and get wiped out that is THEIR FAULT, not WEB's fault for taking the put option position.

2) In recent weeks, on this board we have been kicking around the "total wipe out risk" for BRK that has arisen from taking this position.  You have correctly pointed out that if the S&P500 is at 100 or 200 in 2023, BRK will have a big liability....which might contribute to financial distress for the company.  However, let's probe this idea a little more.  What would the US economy look like if the S&P500 were to fall from 1400 in 2007 down to 100 or 200 in 2023?  Under what circumstances would this occur?  The depression to end all depressions?  If returns to capital including inflation were that low for such a long period of time, what would be the associated impact on the GDP per capita and unemployment?  I would propose that under these economic circumstances most companies, including BRK would be toast, puts or no puts. 

On the other hand, we have kicked around more modest declines in the S&P500, and found them to be manageable, particularly in the context of the potential compounding of the original option premium.

3) If you could not have thought of an event that would sink the ship prior to WEB taking the put position, I would respectfully suggest that you have not been thinking creatively enough!  WEB himself noted that a dirty bomb could have wiped out BRK before they excluded terror from their insurance contracts (ie, pre-2001).  Going forward, on an extremely improbable basis, I could see wipe-out potential from a) a ridiculous increase in litigation for some product that would make asbestos pale in comparison (ex, high fructose corn syrup is discovered to cause XYZ disease), b) a ridiculous biblical series of uncorrelated mega-cats (ie, a super west coast earthquake, 3 or 4 large east coast cities taking a direct hit from a hurricane, plus some other big cats all in the same year), c) political instability in the US (ie, the "Wing-nut Party" wins an election and legislates that all treasury bonds are written down by 50%), d) we experience the mother of all pandemics and nearly knocks us back into the stone age, e) fraud or mismanagement in BRK (Warren's successor comes from AIG or Enron).

Overall, I think you are excessively concerned about the risks associated with these puts.  As Scott Sagan said, "...things that have never happened before happen all the time."  Fortunately, the really extreme stuff is very, very rare.

SJ

watsa_is_a_randian_hero

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Re: Not the Opportunity of a Lifetime
« Reply #13 on: March 10, 2009, 08:43:27 PM »
Quote
To not do something because their is a very small chance you may lose is not a good decision. The key is what you are getting paid to take on the risk.

Yet even Buffett has said there are risks he will never take, regardless of what he is paid to take it on.  Assuming sfwusc's analysis is correct** for the sake of argument, going long with BRK with your entire net worth is no different than Citigroup's risk managers ... one is getting paid to take a 1 in 100 year event risk and completely brushing it off.  I am always worried when people bet against Black Swans with their entire institutions/portfolio.

** Big assumption

What makes WEB's S&P & CDS plays bets against black swans with their entire institutions.  I disagree with this.  Its not as though the risk is unlimited.  There is a limited amount of risk here.  WEB has the funds to pay if need be.  
« Last Edit: May 05, 2011, 09:55:01 PM by Parsad »

sfwusc

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Re: Not the Opportunity of a Lifetime
« Reply #14 on: March 11, 2009, 08:25:15 PM »
Well, you go to enough message boards related to value investing, and finding people all in on Berkshire isn't hard to do. Buffett isn't given almost perfect view like he doesn't make mistakes.  He is way smarter than me in business, but he isn't perfect.


I am not saying that the black swan will happening, but I think it is very different than anything else ever underwritten by Berkshire Hathaway.  They were paid through the nose for it too.  I mean no one else could write such a policy and the buyer think they would be able to pay off on it.

Yes,  an A bomb or mass natural events could have done it as well.  Yet after 9/11 they wrote all contracts to avoid acts of war/terrorism.  I was still poor pre 9/11, and didn't have money to invest :).  So that was before my time. 

The puts are very correlated to other investments.  If we had mostly treasuries like FFH did, then it wouldn't have been so bad from a risk point of view.

We are debating a massively rare event.  I think saying that people going super overweight in Berkshire now is more crazy than before due to the puts.  Still, if the puts kill them, then only gold, silver, guns, ammo, and food are likely to be winners.  Mostly, the ammo and food :).

-SFWUSC


Rabbitisrich

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Re: Not the Opportunity of a Lifetime
« Reply #15 on: March 11, 2009, 08:50:25 PM »
SFWUSC, I'm also not a big fan of the puts for the reason that the method of payment is so closely related to the cause of payment. But solvency risk isn't really much of a concern. If Berkshire does have to pay, it will pay the difference between the indices and the strike prices X notional value. So you don't have to worry about Berkshire setting aside a massive cash outlay to purchase the actual notional value. There is no counterparty risk.

As far as the disaster scenario, where Berkshire is forced to pay for a substantial portion of the notional amount, the main risk involves opportunity cost, since much of Berkshire's equity will be liquidated just as market prices collapse.

It's possible that the recent moves into fixed income are meant to diversify Berkshire's liquidity away from the market. Pretty unlikely, but I like knowing that operating cash flows might be ridonculous going forward.