Dynamic

I was put to on all my short puts in AAPL, BAC and WFC, having expected on Thursday that it would take quite a large Friday drop to be exercised on anything other than BAC. That drop happened and the stocks were in my account on Saturday. AAPL effective price $167.62. Latest price $168.09 BAC effective price $26.07. Friday price $25.42 WFC effective price $49.92. Friday price $50.25

I'd agree that you have to be very careful about the garbage in garbage out problem when using it to make financial decisions such as valuations. The assumptions you build into your model are important and it's worth checking the sensitivity of your model to changes in various inputs to see what inputs are most at risk of producing flawed results, either in terms of expected value or in terms of risk of loss. If in doubt, perhaps it's safest to err on the pessimistic side, especially if the sensitivity is very high. Personally, I wouldn't even want to cut it close, so in practice I've never used Monte Carlo simulations for investing. The most I've done yet is more like scenario-based modelling, and the specific situation where I invested offered such attractive returns from the typical situation that it far outweighed the potential loss from the lower probability fringe case scenarios. I then simply tied my exposure to the amount I felt I could afford to lose in the worst case and still meet my long-term goals via my safer investments. Where I found MC simulation in Excel to be very useful was in product engineering in my previous career, combining different kinds of probability distributions other than Normal Distributions to prove that a product would remain within its relatively narrow output power specification window throughout the full design life with very high certainty given the product screens we had implemented. For example, bipolar probability distributions, box-car distributions and truncated normal distributions, or Poisson distributions for different variables can be combined by Monte Carlo simulation to generate the overall output distribution. If you're only combining Normal Distributions of a few variables by addition and subtraction there are some simple rules to combine the standard deviations (or variances), which negate the need for a Monte Carlo simulation.

Sold some WFC $50.50 strike 7 December puts for $0.58 while I was out during my vacation thanks to a GTC limit order.

Great first post, @longterminvestor and welcome to CoBF. I agree with your last point. If the right deal comes along at the right price it doesn't matter if the market is high or low. If the deal happens to be $100 billion, I'm sure they'd be content to use $20bn of debt to retain the $20 billion cash cushion while they either liquidate some of the stock positions or simply accumulate cash from operations and dividends received. The times when cash has dipped below float have typically been when great deployment opportunities have arisen, and while they tend to coincide more-or-less with recessions and bear markets due to the lack of competition from less disciplined capital, it seems to be the right deals at the right prices that drive it. Effectively the float leverage really gets supercharged during times when quality assets are cheap (prices like fair assets), then it returns to normal by float being roughly equal to cash when assets get more expensive.

Wrote some 7 December cash covered puts on AAPL 170 strike for $2.38 BAC 26.50 strike for $0.43 Hat tip to boilermaker75 for this approach to opening long positions.

I really loved this thread, particularly SHDL's response. I've not really gone deep into trying to understand Black-Scholes, so its possible my understanding isn't quite right. Black-Scholes and the variations of it for American style options and dividend-payers and those incorporating expected growth trends, were designed based on averages over large numbers of underlying stocks, and fit pretty well on average (averaging over time and over different stocks) and over shorter time periods. On average over time and over a wide range of stocks, the market behaves mostly pretty efficiently, so they bake the assumption of perfect efficiency and of volatility meaning risk into Black-Scholes and back test it and forward test it and it seems to work remarkably well on average. It's also easier to test it on frequently traded options with small spreads, which mostly means relatively short-dated contracts that actually produce a much larger data set to test the formula. If you look at LEAPS contracts, some of the last trade dates can be days or weeks ago and the published Bid Ask spreads can be as high as 5-10%, so the data set is pretty sparse for testing Black Scholes' validity in such conditions. Value Investors know that there are both times and securities for which the market is not efficient (and it can be a large discrepancy occasionally, which is the moment we achieve our Margin of Safety and place our infrequent trades). In those situations Black-Scholes will not provide an appropriate price, perhaps skewing the probability-weighted risk-return distribution significantly towards or against the buyer or seller of the option, just as mispricing of stocks presents opportunities to the buyer or seller of the stock. One key point is that I think Black-Scholes assumes a relatively symmetrical probability distribution for future prices. This was explained earlier in the thread, with the comparison between a random walk that incorporates memory of recent prices set against the idea of a temporary mispricing based on widespread optimism, pessimism or poor analysis before the price reverts back towards Intrinsic Value. To Value Investors, the larger the margin of safety gets, the lower the likelihood and magnitude of potential loss becomes (even in the short-to-medium term, but especially in the longer term) and the higher both the likelihood and magnitude of potential gains become. While I've had plenty of stocks decline further soon after my purchase, perhaps by 10% over a month or a couple of quarters, I've had rather more positions rise by more than 10% surprisingly quickly after I finally pulled the trigger. This effect is sometimes very valuable if another higher conviction idea happens to occur a few months later and I sell some of the first position to fund the second. If it doesn't happen the second position would have to be even cheaper to be worth the switch. Lower risk (even in the short-to-medium term, but more certainly in the long term) can occur simultaneously with higher reward at those rare times when patient Value Investors finally pull the trigger. Efficient Market proponents completely miss the idea of this highly skewed and asymmetric probability distribution that accompanies an unusually high Margin of Safety, and Black Scholes type models do not incorporate such skewness because these are rare events that tend to average out to near zero over a long period of time and a wide range of stocks. Equally the companies that are predictable and anti-fragile enough for Quality oriented Value Investors to invest heavily in for the long term and for them to assign an Intrinsic Value to, tend to be more likely to rebound from bad news on the political or economic front than the remainder of traded companies out there. So it's possible that IV is so uncertain and thus is not a particularly useful concept for the majority of companies whose prospects get tossed around by the winds of external events. If that were the case, it might explain why on average, Black Scholes seems to work fine and obtain a faithful following while ignoring the outliers that Value Investors aim to pick off and profit from. To be clear there are rare times when markets in aggregate are significantly undervalued and have a positively skewed return distribution, as well as rare stocks among all the stocks out there that are undervalued at any one time and also have a positively skewed return distribution. Buffett's equity index puts were of the former type when markets were statistically cheap and the spread of expiry dates could still be profitable if a market crash fell on one or two of those expiry dates. A Value Investor's purchases at times other than juicy bear markets tend to be of the latter type. On rare occasions, perhaps 2009, Value Investors get a bite of both cherries at once as out-of-favour companies get beaten down further in a fearful overall market.

I have now updated the Look-Through Spreadsheet with the latest 13-F filings plus the purchase of STNE at its IPO which was disclosed last week. The Book Value per share in cell S5 is as at 30th Sep, but the Berkshire shares outstanding are as of 25th Oct per page 1 of the report, a reduction of 0.1% or so. As always I net out holdings by pension funds to show only beneficially owned shares and I also make adjustments for known or previously declared foreign holdings believed to be held, but not required to be reported to SEC in 13-F. My holdings are thus a little different from most Berkshire portfolio updates you'll find online. Doubtless a few of the holdings were trimmed to remain below regulatory thresholds such as 10% or 5% of the shares outstanding when the companies were expected to be buying back and retiring shares. You can find and copy the Google Sheets as before: The spreadsheet I'd advise you to Make a copy of for your own use is: • Berkshire Hathaway Look Through Earnings & Holdings The spreadsheet that is publicly editable by anyone (but anyone can see any edits you make, the edit history, or corrupt the spreadsheet) is: • Berkshire Look through earnings - Public editing allowed The key unknown is the Euronext Paris shares of Sanofi which never gets reported to the SEC in 13-F filings and were only known from the 2016 (I think) Annual Report 10-K, released in Feb 2017. I've left the equivalent number of SNY ADR shares (I think from memory that the ratio is 2:1, but it's easier to report the value directly in USD currency instead of EUR). All the ADRs have been sold. If the Euronext Paris shares were sold also, it might change the portfolio value by about $1.8 billion. The total valuation of my Look Through portfolio when set to 28/09/2018 closing prices (excluding KHC, which is accounted for using the Equity Method) was about $1.34 bn below the market valuation of equity holdings shown in the 10-Q filing, so I may well be missing something or subtracting pension holdings that are no longer held from the totals shown in 13-F. These might be pension holdings that I once deduced from comparing an annual report to the year-end 13-F but not a 13D or SC 13G filing but have not found an update on since. I might take a look for some likely culprits (including currency effects I may not have got corect for foreign holdings) and report back. It's probably good to make some best guess assumptions to be a bit more roughly-right and a bit less precisely wrong. There's a summary of the changes from quarter to quarter on the tab COMBINED HOLDINGS, columns D, E and F. This is only by share-count not market price, but below is a commentary on the changes which I posted in the General news topic:

Given the relative trading volume of Berkshire versus a lot of the recent purchases within their portfolio, I'd imagine the portfolio purchases will put the cash pile to work considerably faster than repurchasing Berkshire stock, but over many years I think the effect of repurchases could be a modest but useful contributor to per share value growth with maybe the occasional negotiated repurchase from an estate. Clearly we now know that Berkshire was quite busy with the portfolio during Q3, quite possibly the early part of the quarter when prices were lower. Perhaps mid to late October was another time they were busy after the markets fell back about 10%. I guess the JPM stake (~ 1% of market cap) will have to increase 5x before a 13D or SC 13G filing would reveal any personal stakes (as the DVA filings do for R Ted Weschler).

I think the fall in the market from around Oct 10th to 26th was probably sufficient for them to really build their stakes quite aggressively at even better prices than those during Q3. Not sure whether it would be up to 10% of JPM, but I'd imagine they could have put a lot of capital to work in that period on stock purchases and Berkshire buybacks too.

I'll update my public Look-Through portfolio sheet soon, but for now here's a summary of the moves. The following figures are for the shares beneficially owned by shareholders, so they exclude known Berkshire pension scheme holdings. They also include stocks held via New England Asset Management for Berkshire but filed in NEAM's 13-F with owner code '01 02'. AAL -4.2% -1,000,000 shares American Airlines falling to 22,958,000. The other 20,742,000 are in pensions. (buyback related reduction?) AAPL +0.2% +522,902 shares Apple up to 252,810,459. Another 2,837,753 in pensions. BAC +28.6% +200,000,000 shares Bank of America Corp up to 900,000,000 BK +42.1% +24,111,850 shares Bank of New York Mellon up to 81,400,977 (plus 7,511,249 assumed in pensions) CHTR -2.8% -163,200 shares Charter Communications down to 5,640,648. (1,700,337 more in pensions) DAL +2.9% +1,869,160 shares Delta Airlines up to 65,535,000 DVA - unchanged but own a higher percentage due to DaVita buybacks GHC - eliminated Graham Holdings position (was 107,575 shares) GM +2.3% +1,067,800 shares General Motors up to 46,988,558 (5,472,853 more in pensions, assumed) GS +37.3% +5,099,145 shares Goldman Sachs up to 18,784,698 JNJ -8.0% -28,382 shares Johnson & Johnson down to 327,100 JPM New Position 36,209,767 shares JPMorgan Chase & Co LUV -0.9% -500,000 Southwest Airlines down to 56,047,399 (buyback related) ORCL New Position 42,691,791 shares Oracle Corp PNC New Position 7,187,819 shares PNC Financial Services Group Inc PSX -55.6% -19,296,490 shares Phillips 66 down to 15,433,024 SNY - Reduced/Eliminated uncertain. -3,701,012 shares in US ADRs eliminated. Euronext Paris stock is not reported on 13-F. May still hold approx 40,433,985 equivalent SNY ADRs based on 2016 10-K via Paris TRV New Position 3,586,688 shares Travelers Companies Inc UAL -2.8% -700,000 shares United Continental Holdings Inc down to 24,393,163 (1,591,379 more in pensions) probably buyback related USB +15.3% +18,203,375 shares U.S. Bancorp up to 137,120,760 (590,275 more in pensions) VRSK -64.0% -1,779,811 shares Verisk Analytics Inc down to 1,000,325 (all remaining shares in NEAM now) WFC -2.8% -13,374,425 shares Wells Fargo & Co down to 465,156,000 (buyback related trim) WMT Eliminated Wal-Mart Stores Inc position (was 1,393,513 shares)

A new SEC filing of type SC 13G has appeared, disclosing an 11.3% stake in StoneCo Ltd. (ticker: STNE) of São Paulo, Brazil (14,166,748 shares of Common Stock) None of this is attributable to Berkshire's pension funds - all is held via National Indemnity Company. The IPO came after 30th Sep 2018 so it will not appear in the 13-F filings which are likely to be released in the middle of next week. The price since IPO on 25th Oct has been between about $27 and $31 per share. At current price of $27.70, the stake is priced at $392 million USD. The IPO price was $24 per share, Berkhire's stake presumably having cost $340,001,952. The 13G filing must be made within 10 business days of acquisition of a 5% stake, so it's likely to have been acquired on 25th October at IPO.

I found the actual quarter end share counts versus year end 2017 buried deep in the notes to the 10-Q, around p23 of I recall correctly and they generated exactly the closing Book Value Per Class A share that the News Release contained. It also included conversions of Class A to Class B. The lowest price in October of around $197.50 happened on October 26th, a day after the page 1 share count,, so I could imagine further repurchases in October would have been likely unless there's a blackout period. I was lucky enough to add exposure close to the bottom tick. I'm on my phone now, so not ideally placed to do the calculations based on those figures, though clearly globalfinancepartners must have made a sufficiently good calculation.

I'm not sure if the Safe Harbor rules, when trading is conducted using predefined criteria through a single broker would exempt the company from having to cease buybacks during the blackout period. I've not read anything that make that very clear.

Ah, thanks, IceCreamMan. (I'll have a '99' with an extra Flake please :P - a little quip for my fellow Brits) I'm surprised AP News releases didn't show up last time I checked BRK.B on Google or Yahoo! Finance

It's quite possible, if what John noticed about Citibank is anything to go by, that Berkshire will change its practice regarding revealing the number of shares in issue shortly before the date the 10-K is released, particularly now that meaningful sums from the cash balance could have been spent on buybacks to reduce the share count, which would affect both the balance sheet and cash flow statement as well as the share count itself. I guess the only significant purpose now in providing the share count is in allowing people and entities with SEC filing requirements of their own to determine their fractional stake in each class of share as of the most recent disclosure by Berkshire and report it appropriately to the SEC in Form 4 or 13 D/G filings etc. Beyond that it's an unnecessary early disclosure of the buyback rate, although in most time it wouldn't give too much away about their conservative appraisal of IV. Last quarter the earnings release time of Saturday at about 8am was announced on the preceding Thursday, though that wasn't the case last November except for annual reports, but has been the case for every quarter since. I wonder if in the absence of such a News Release yesterday or so far today we might guess that Berkshire's 10-Q will be released next week - Fri 9th Nov or Sat 10th - rather than today after the closing bell or tomorrow as a few financial data providers had guessed based on previous filings such as Fri 3rd Nov 2017. If so, any share count info on the front page might be as of some point next week (unless they change to showing only quarter-end figures). Delaying a week while buyback prices are well below IV before revealing their hand could provide a modest but worthwhile boost to IV per share if the 10-Q happens to reveal that something close to 25% of recent volume had Berkshire Hathaway as the buyer and that news were to provide a significant boost to the stock price.

It will certainly be interesting to see the number of shares outstanding at 30 Sep 2018 and those around Fri 26 Oct (printed at the foot of the front page of the 10-Q) especially as BRK.B has spent half of October at around $215-$224 and then dropped to below $210 and as low as about $197.50 during the session on 26 Oct (I topped up my exposure around that level on Friday). On the old faithful metric of Book Value Per Share, the quarter probably ended around $228,500 per A or ~$152.30 per B share, but has since dropped thanks to the assumed stock portfolio retracing a lot of its gains, alongside the market in general. I'd guess ~$197.50 was just below 1.3x BVPS at quarter end, but just above 1.3x BVPS when adjusting for the portfolio decline and typical earnings over 26 days. 1,3x BVPS has typically been a good buy point, though the rare times below 1.25x BVPS (e.g. Jan-Feb 2016) are obviously even better and limit the near term downside risk enormously. My thought is that that ratio of IV to BV has increased a little and this is recognised by Mr Market, and prices significantly below 1.3x BVPS will perhaps be rarer still over future years. BRK purchased at such a price is likely to return inflation+ 6% to 9% compounding with quite a high probability to my mind, and short term downside risk is likely to be limited to about 10% except in the depths of a major bear market, making Berkshire stock at that price a great place to earn a healthy compound return if held long term with a short-term return distribution skewed significantly to the upside, while retaining optionality close to that of cash, allowing me to redeploy my funds at short notice if I happen to find a bargain high conviction opportunity that warrants substantial exposure (and these high conviction ideas might be once in 3-5 year finds so on average I have plenty of time to compound value while I'm waiting). Berkshire also carries, to my mind, very little company risk, because Berkshire has so many diverse earnings streams and autonomously run subsidiaries operating in only modestly correlated areas of the economy, and because it is famously a prudent long-term capital allocator with a strong aversion to permanent loss of capital. While the opportunities around $185-190 in late July were great buy points to me, I suspect that prices around $198-205 now that the buyback rules have changed will be very likely to have seen significant buyback volume in October, though as SwedishValue points out, it might still do little more than offset the cash inflows from operations given the limitations offered by SEC Safe Harbor guidelines.

To the question of how Charlie and Warren value the investments, I don't think it matters so long as they are suitably conservative and are not in excess of market value. Using Market Value itself or applying a discount to Market Value to apply a windage factor to normalize to a more typical market valuation is one approach. If they valued the companies independently they would either be calculating IV with a high enough discount rate or capitalization rate to be conservative or they'd calculate a more fully-valued IV then apply a suitable discount to be conservative. (And in a similar way they would be valuing subsidiaries with a similarly conservative assessment of what they're worth given the current normalized earning power) Whichever approach they take they'd arrive at a similar figure, being conservative, I'm sure. At the end they may choose how to account for cash held and how to value float and normalized underwriting profits. A few commentators have noticed that over the years the cash balance is usually pretty close to the float liability and only dips significantly below float during bear markets or similar opportunities to make large acquisitions, and that remains roughly the case today. To me this offsets the feeling that there may be a cash drag if the cash doesn't get invested fast enough, but instead limits the multiplying effect of the float leverage except when cash is being used up to buy cheap assets. Float is a liability, but the funds are so likely to endure (3% per year decline rate at most, but more likely to gradually increase over time) and to remain cost-free (thanks to profitable underwriting) that one could effectively count as much as 70% of float as an effectively enduring asset whose economic earning power is worth paying for. Perhaps, being more conservative, we'd value it at less or apply a margin of safety at the end of calculating the full IV. To be frank, I'd expect them to make a relatively simple calculation with amply conservative assumptions built in rather than going to great lengths to adjust market values of securities very much. They're still intending to pay significantly less than IV, but perhaps a 5-10% discount to a conservatively calculated IV amounts to the same as a 30-50% discount to an IV that represents the line between fully valued and overvalued.

Me too John, I had just read the SA article before seeing your post, alwaysinvert, and you hit every point that occurred to me. Although the signal to noise ratio of SA is not a patch on CoBF's, it (including the comments) isn't a bad place to gauge varied opinions and see where we might have a better perception that Mr Market, and sometimes also there are some real gems of great analysis posted there as well as technical analysis/chartism and stuff I'll happily skim over. It is interesting that the (assumed) Berkshire portfolio has lost about -$6.3bn gross (-$5.0bn net of deferred tax benefit) since 30 Sep. That's about -$2.01 per BRK.B share reduction in the portfolio's contribution to Book Value in 18 calendar days since quarter end. I'd guess roughly that BRK.B BVPS was maybe about $152.30 at 30 Sep, but might be a little below $151 today - perhaps around $150.90 (allowing for net earnings flowing in, less net portfolio decline flowing out). The repurchases might actually reduce BVPS a tiny bit, but increase IV per share slightly too.

Yes, watching my portfolio plummet back from the all time high of $224 at yesterday's open, I was thinking Berkshire's broker could be getting busy with the buybacks today around $210, prices we haven't seen since the end of August.

True. Lehman's ultimate exposure was far in excess of their assets thanks to all those complex derivatives

To be fair to the rest of the American 'Left' this is Bernie Sanders, who I understand is at the left extreme of the Democratic Party, not all of them, and it's almost certain not to pass. I hasten to add I have no skin in the game as a non American.

I knew nothing before finding that investopedia article. I'd be quite surprised if Berkshire has repurchased anything close to 25% this quarter, so any subtleties in interpretation of the rules are probably moot, and an approximate upper bound on open market repurchases is all we're likely to establish so these figures look about right. If the excess cash is just below float until the next major opportunity to invest it at a good price, I'll be happy enough.

Just edited both versions to account for the sale of Philips 66 (PSX) announced on Sep 10th 13G/A filing. I've added a line for the pre-tax proceeds of the sale, as this cash is available for investment but the actual post-tax proceeds will be reflected in the balance sheet for Q3 when release in November, and I'll remove it once the 2018-Q3 13-F is filed. I assumed it raised about $117 per share on selling 12.5 million shares, raising around $1.467 billion pre-tax ($1.467 bn). Assuming the cost basis is still around $78.31 as it was at 2017 Q4, this gives about $484 million estimated capital gains that might have about a $97 million tax liability at 20% (about $7.74 capital gains tax per share sold). The $117 is essentially hard-coded in the price. The remaining stock is still shown at current market price. If you want to account for the estimated tax, you could hard-code the price as $109.26. I'm including the gross proceeds in the portfolio until the end of the quarter just to aid in tracking its total value. The cash proceeds don't contribute to look-through earnings any more. In the quarterly financials, the cash balance and the tax liability will be updated to include the effects of the sale and I'll then remove the cash. This is much the same as happened during Q2 when Monsanto was acquired by Bayer for $128 per share.

I'm pretty much the same LC, but tending towards GARP and highly concentrated positions. This has met my goals and my tax consequences are minimal even if I do change horses now and again. High growth is beguiling but I'd find it difficult to do. The best approach is perhaps for things like Amazon where you adjust some expenses like R&D and advertising to amortize them over their expected life. Adjusted earnings then are much higher and valuation doesn't look so stretched near their low points. The beauty is that you only need a moderate initial position to have a meaningful impact if it becomes a 10+ bagger. It's something I'm looking at with a view to taking advantage of temporary price declines, but I'll still meet my goals with GARP if I miss such an opportunity.

Great post, @alwaysdrawing. I particularly liked the Bezos analogy. I generally think that value investing covers a number of categories. Buy cheap and wait for rerating. Sell when close to fully valued or when something considerably cheaper is available. Typically up to 2-3 year time frame. Company not likely to compound much above inflation, so need to pay tax on gains then reinvest sale proceeds and dividends in another cheap company. Rinse and repeat. This is classic Graham and Dodd. Essentially Buffett buying Berkshire Hathaway mills was such a situation, but by taking control he was able to reallocate capital into other investments internally. In fact BH mills were in terminal decline. Special Situations. Things undervalued on probabilistic basis including merger arbitrage, offering sufficient probability weighted annualized return. Return likely to be independent of market conditions. Short term gains. Need to rinse and repeat often. An example merger arbitrage is probably Berkshire's purchase of Monsanto now taken over by Bayer. Solid companies at cheap prices. They distribute most of their cash but cannot reinvest it internally. You could hold forever and find good places to invest the dividends or you could sell when fully valued and have to pay taxes and reinvest elsewhere. This is how Berkshire treats See's Candies - it reinvests the dividends submitted to Omaha. See's has grown somewhat but close to inflation. Spending on expansion would be a lower return activity than Berkshire's normal investing. No need to sell so no tax realized. Growth at a Reasonable price (GARP) or even downright cheap. Companies that have good internal reinvestment opportunities at high incremental rates of return. No need to sell and pay tax on gains. Dividends may eventually grow enormously and require reinvestment. Coca Cola during the temporary New Coke hiccup, American Express during the salad oil scandal, Apple focusing on the premium market but having a down year in 2016 (cheap) or in 2018 (fair price). Get it wrong and you don't lose much if you bought at a reasonable price unless it enters terminal decline like Nokia. No need to sell so no tax realized. High growth companies. Amazon is an example where they spend cash flow on growth and moat building. Even at 30-40* earnings or FCF in early years the huge compounding leaves you with huge profits. Stay invested and you'll reap huge returns. Get it wrong and you could lose big. No need to sell so no tax realized. Most sound value investments on the long side fit into that spectrum from rinse and repeat being required to never selling unless the story truly changes.