Has Warren Buffett Gone Bonkers?

[Parsad]

Good article on Buffett, Berkshire and the S&P derivatives contracts.  Cheers!

 

http://www.theglobeandmail.com/report-on-business/rob-magazine/has-warren-buffett-gone-bonkers/article1719266/

[Guest ValueCarl]

I wrote this to some friends, yesterday, about the article. You see, I even use CAPS when writing to my real friends!  ;D

 

I'm also wondering if Buffett's GEICO "Cave Man persona," is offended by these things I write! LOL

 

If by some miracle by the Lord of Hosts above, America returns to printing her own currency without interest, I want "The Greatest Financier of Them All," to manage their money supply until he leaves us!  ;D 

 

 

Put SALES are a wonderful tool for generating cash, especially if a man knows what the hell he is doing given enough "TIME."

 

Yes, "price is what you pay, value is what you get!" If you can't value correctly, you're in a hell of a lot of trouble.

 

Without going to Buffey's book for realized or unrealized profits, between the long waiting periods he made his bets on,  the broad stock averages today, are HIGHER than where he SOLD the PUTS yesterday! That's not to say, we're not going to see "dislocations" again in the near or medium term tied to "business stresses" which remain HIGH. 

 

The only RISKS I can fathom which would make Buffett look like a complete fool for selling these puts and taking in those HUGE CASH PREMIUMS, are the utter destruction of the known monetary system as we see it today.

 

It would take a nuclear WW3 to accomplish that, if it were to occur, although then, everybody's DEAD in a world of NUCLEAR WASTE bringing us back to the cave man days, so that, Buffett's Ghost in ten or twenty years hence, will still be laughing!

 

Warren's a genius and the greatest stock operator, and businessman with a control freak in his heart, who will have ever lived!

 

 

 

[Guest longinvestor]

The math is simple, the bets date from 2018 to 2028. Call it 15 years on average from 2008. BRK got paid $6B in premiums, which at a 10% return rate would grow into $25B, @12% into $33B and @15% into $49B. And what is the worst case bet? That 3 stock mkt Indexes go to zero. Classic WEB "1-foot-hurdles".

[Guest ValueCarl]

I don't understand. If all three indexes go to zero, how does Warren earn 10, 12 or 15 percent on the original premiums?

 

Is this the same man who has prepared the public for six percent annual returns for as far as the eye can see too?

 

 

[stahleyp]

I don't understand. If all three indexes go to zero, how does Warren earn 10, 12 or 15 percent on the original premiums?

 

Is this the same man who has prepared the public for six percent annual returns for as far as the eye can see too?

 

 

 

 

If the indexes go down to zero, then he'll lose quite a bit. The article talks about him earning 8.3% over the past 10 years. The author then states "For Berkshire to lose money, stock markets in 2019-’28 would have to be down more than 50% from 2004-’08 levels."

 

I'd say that if the markets would've lost that much over the period, BRK probably wouldn't earn those 8.3% annual returns.  I think there's more risk to the strategy than what the author conveys. I wouldn't bet against WEB though!

[Guest ValueCarl]

Ah yes, back to my nuclear wasteland imagery where "cave men" rule planet earth again!

 

Saw the new "Wall Street" flick this weekend, while the masters of the universe attempted to confuse us by mixing fiction with fact. For example, the attempt was to ascribe to one bank, its power to destroy one competitor, as opposed to the factual destruction of Bear Stearns and Lehman by Goldman and The House that Morgan built over at JPM. Having the fictional, Ace Greenberg, throw himself underneath a speeding subway train was also something one can only wish the whole lot of those dubious practitioners did during the heat of the battle which ended up placing an untold tax on future US generations. Now, that would be honor out of respect for the millions of US soldiers who had sacrificed their most precious "gift" over time, in order that those clowns could be sitting around the deal making tables that they do while shunning their responsibilities!

 

One of the great lies in the movie was the character depicting former Money Changer, Paulson, and his comment regarding TARP, something to the effect that, "I have worked my whole life fighting against socialism" before capitulating in favor of the bailout and too big to fail mantras these scoundrels want to keep! Truth is, however, his dubious, coordinated act to sustain Goldman Sachs as leader in the marketplace, has accelerated socialism in a way that US citizens should be seeking his head in a trial for treason!

 

Warren Buffett would be surprised how quickly a nation restored itself to prosperity, when "rules of law" are considered sacred again, with its people witnessing the perpetrators in the highest parts of the pyramid being held accountable for their ugly ways.

 

Speaking of ugly ways, one real persona who made his way to "The Big Screen" was Jim Chanos, Miscreant Supreme!   >:(

 

The investment theme being pushed to the masses in the picture was "Green Technology" for point of information. As a result, I think it should be shunned, more in favor of, let's say, "SILVER SHEKELS" or "BROADBAND BITS."  8)

 

I think the "good bye" message from the movie was, "BUBBLES" will never be curtailed as they let them blow into the air of a Manhattan skyline, where Gordon Gekko's baby grandson's, birthday party was taking place.    

 

 

[Guest longinvestor]

 

If the indexes go down to zero, then he'll lose quite a bit. The article talks about him earning 8.3% over the past 10 years. The author then states "For Berkshire to lose money, stock markets in 2019-’28 would have to be down more than 50% from 2004-’08 levels."

I'd say that if the markets would've lost that much over the period, BRK probably wouldn't earn those 8.3% annual returns.  I think there's more risk to the strategy than what the author conveys. I wouldn't bet against WEB though!

I was given to understand that the indexes have to be at or below the same level on a specific date 15 years from the date the derivative contract was written. If the index is above, the contracts turn worthless. And BRK keeps the premiums and what it earned on them. Which will likely be a 4 bagger, 6 bagger, 8 bagger or something. It is not about what happens between now and then is how I understand it. All WEB is betting is that the world will be different 15 years. Better. And yes there will be a world with the US in it!

I dont know about BRK returns being 8.3% but dont we know by way of examples that GS pays, what, 10%, GE 12% etc on the the money that was loaned them by BRK? WEB used the term tick-tock-tick-tock..we get paid by second-by-second to describe those investments.

[Guest ValueCarl]

Longinvestor, how much will he payout at the contract's end if the value of the indexes are down fifty percent from where they were at "post time," let's say with a corresponding Dow of $5K, S&P 500 at $500, etc.? That would be a less sanguine US outcome, but not of the magnitude of zero, which is where the world ends, and WEB's owners keep all the put premium but it's vapor ware because only "cave men" are there with sticks and stones grunting and moaning, or flint which they will end up lighting such paper trash with to keep warm again, when they figure out how to make "fire"!     

 

How will that compare to what he collected and how much money it grew into over that same period using his "blended" returns for himself during the past ten-fifteen years? It's good to stick his GenRe performance in the mix since he's not immune to making mistakes from time to time, either, now is he? imo

 

 

[Guest Bronco]

In regards to Buffett and puts - this is classic Buffett.  Doing this for forty years.

 

Float - cash upfront, payout (if any) later. 

 

Insurance

Blue Chip Stamps

Selling Puts

 

 

All the same thing.  This is Buffett selling another insurance product.  He will win.  Even if he isn't alive to see it - this was a good bet.

[nomore]

LOL!

 

http://www.bloomberg.com/news/2010-09-27/dow-super-boom-will-drive-average-to-38-820-stock-trader-s-almanac-says.html

 

Damn! 38820!

 

So precise.  :P

[Guest broxburnboy]

Seems to me that  Buffet is betting on a what he knows is a sure thing...continued QE. The markets will not be allowed to retreat to anywhere near zero as long as

there is a printing press. This ought to convince the deflationists in the crowd the error of their ways. Look for him to now invest the proceeds into inflation (currency devalued) resistant businesses like newly emerged economies, commodities, silver (again) in order to consolidate these windfall gains.

[Guest longinvestor]

Longinvestor, how much will he payout at the contract's end if the value of the indexes are down fifty percent from where they were at "post time," let's say with a corresponding Dow of $5K, S&P 500 at $500, etc.? That would be a less sanguine US outcome, but not of the magnitude of zero, which is where the world ends, and WEB's owners keep all the put premium but it's vapor ware because only "cave men" are there with sticks and stones grunting and moaning, or flint which they will end up lighting such paper trash with to keep warm again, when they figure out how to make "fire"!     

 

How will that compare to what he collected and how much money it grew into over that same period using his "blended" returns for himself during the past ten-fifteen years? It's good to stick his GenRe performance in the mix since he's not immune to making mistakes from time to time, either, now is he? imo

 

I remember reading that BRK will pay out something like $16 B if the indexes went to zero on that date 15 years out. So between 0 and $16B is the payout from BRK if the indexes are below the 2008 level. versus 4 Bagger:$25 B, 6 Bagger: $33 B; 8 Bagger=$48B....all that would fit on the back of an envelope.

 

 

[stahleyp]

LOL!

 

http://www.bloomberg.com/news/2010-09-27/dow-super-boom-will-drive-average-to-38-820-stock-trader-s-almanac-says.html

 

Damn! 38820!

 

So precise.  :P

 

That doesn't seem like a bad argument. I don't know about the "superboom" for 8 years of awesome growth, but if we assume the down will end this year at 11,000. 7 years or so at 10% return, that would be 22,000, then another 7 years at 10% would be 44000 at 2024.

[mpauls]

Something was said about this earlier this year.