Buffett/Berkshire - general news

[Liberty]

Thanks Charlie!

[fareastwarriors]

The Warren Buffett approach to investing overseas

 

Three of Berkshire Hathaway's top U.S. stockholdings receive more than 50 percent of revenue overseas

 

http://www.cnbc.com/2015/11/16/the-warren-buffett-approach-to-investing-overseas.html

[Shooter MacGavin]

here's a hypothetical wild idea to earn around 18-20%+ per year on your portfolio for a while without breaking a sweat.  Someone please tell me why this is dumb.

 

Why not sell everything you own to start?  dump into into BRK B . Margin 2:1 and then buy the jan 18 $120 puts for the borrowed portion to hedge your downside from a margin call. 

 

put are around $7 or 5% on $136 trading price, and margin cost is around 2% per year. 

 

So you're paying a total of 2.5% plus 2% per year so 4.5% per annum pre-tax.  About 3.6% (post tax rate) per year. 

 

I think from here Berkshire incrementally compounds at 10%-13%, and maybe you get a little better for buying at a slight discount today.

 

Even if the market crashes..you're not going to get a margin call for a $120 put (especially if you have portfolio margin in IB).  Just make sure to roll the put forward 6 months ahead of time so you never are going to be forced to exercise it if the market does crash.

 

The other hedge here is that in the event of a market crash, Berkshire will buyback stock at about $124 by my math...so its unlikely it will stay low for too long.  (And god forbid if it did stay low, the stock buyback should be highly valuable to remaining shareholders so that the internal compounding per share may go up another few points)

 

So basically the stock itself say it does like 12% per year (10% internal and 2% from a slight market multiple increase to more fair level) over the next two years.

 

by my math thats about 18.6% per year.  not too shabby.  just hang out at the beach and check back here once in a while.

 

why you would do this with berkshire ONLY is quite obvious..it's the safest financial instrument you can own in the world, its undervalued, and the put is cheap because the option market knows ( I think) that the stock isn't going to fall by too much and if it does it'll come back because of the repurchase.

 

[scorpioncapital]

If things go right - the default case - doesn't the put negate the point of doing the 2:1 margin thing in the first place? And if things go wrong, doesn't that also negate the point of doing the 2:1 margin thing? Seems to me if you hedge using borrowed money you might as well not use borrowed money at all.

 

 

[Shooter MacGavin]

you're just hedging the borrowed portion so you don't ever get a margin call.  You still have to be right on the thesis.  So in this case, unless buffett himself is wrong on the thesis he thinks its very valuable at $124 (1.2x book).

[Shooter MacGavin]

I guess just to clarify, yeah don't borrow the put premium.

[scorpioncapital]

So let's say you buy $50000 (~365 shares) and put up $25k.  You buy ~2 contracts at $7 each or $1400 Over 2 years cost will be - ~$2400 (2% interest+the put)

If the put expires worthless you just bought insurance for $1400.

If the stock goes to say $100 ($36,500, or a drop of 36% from today's price) you have a margin call ($18.25k - 11.5k) of $6.75k.

Will the put be worth $20 ($120 strike - $100 stock price) or $4000, about $3k short of the margin call?

Or is the assumption that Buffett's stated buyback level is a kind of floor for the price and your assumed margin call?

 

[Shooter MacGavin]

Bear with me.... I'm slow.  I'm not following your math completely.  So I'll just lay it out the way I think about it.  If my math is wrong here, please let me know.

 

1) I fund $27.2k of equity

2) I borrow $25k

3) My starting assets 366 shares at $136 (=$49.8k) + 2 put contracts 120x strike, Jan 2018 = ($7 *200 = $1.4k), and $1.0k of cash for interest payments

 

 

Scenario 1: (forget about puts for the moment)

Brk.B tanks to $90 the very next day.

 

1) total assets (not including puts): (366 shares * $90 or $32.9k in stock) + $1.0k cash for interest payments

2) Total liability is still $25.k

3) so equity is worth $8.9k

4) If maintenance margin is 30%, then I'm below.  Because I'm at 26%.  (8.9 / 33.9 ).  So I need to cough up $1.3k, otherwise they close me out.

 

 

 

Scenario 2: (Put hedge kicks in)

1) total assets: $32.9k in stock (366 * $90 per share ), new put value = (($120 - $90) * 200 contracts) = $6.0k, cash for interest payments of $1.0k

2) total liability = $25k

3) equity = ($32.9k +$6.0k + 1.0k) - ($25k) =  $15k.

4) my equity % of assets = 37.5% ($15k /$39.9k) , so in this I'm not getting called out.  My put hedge counts for equity

 

So no matter how much the stock falls below $136, I'm not going to require more margin. Without the puts, I would get a margin call at around $97 or so, but the puts become more valuable once the stock declines below $120 offsetting my equity losses.

 

In fact, one could make the argument that i should just buy $100 strike put instead of a $120.  That's something to think about as well. 

[Shooter MacGavin]

 

If the stock goes to say $100 ($36,500, or a drop of 36% from today's price) you have a margin call ($18.25k - 11.5k) of $6.75k.

 

 

ah i see what you did.  you're using 50% maintenance margin (18.25 / 36.5) .  However the maintenance margin requirement (for IB at least ) is 25%.

 

https://www.interactivebrokers.com/en/?f=margin&p=overview3#margin-01

 

 

[scorpioncapital]

Gotcha, yes, I used 50%. If the goal is to maintain a fixed number of leveraged shares regardless of how much the share price drops, then this could work. Perhaps another way to look at it is - getting a margin call at 30% might be a favour from your broker if you feel you might start to sweat - even with the put - if Berkshire hit $50 and your equity went from $25k to $6.3k, even temporarily. But one thing that did make sense in your example is that it's better to buy put insurance when you don't need it and it's cheap rather then when prices are dropping and it's expensive :)

 

 

 

 

 

[physdude]

The exact equivalent of buying DITM calls is safer from a margin perspective and far more advisable IMHO (eg., if a broker suddenly raises the margin requirement).

[Shooter MacGavin]

hmm.

 

I guess if you bought a closer to the money put (at a higher premium) you could also alleviate that problem, say $130 instead of $120. 

 

The problem i see with a call though is it is not tax efficient.  If it works, you're going to, before expiration, be forced to sell and book a gain. So unless you're in  a tax free account, where I believe but am not sure that you can't borrow on margin anyway, then I'm not sure a call is the best option. 

 

Maybe in a tax free account, entering a call makes sense, at the right premium of course. If you go deep-in-the money, with a long dated strike however, my gut tells me that you're paying for a put that may be pretty useless if the market doesn't agree with you in two years.  Some math to illustrate may be in order, but I'm having a lazy Sat so maybe I'll re-post at a later date.  ;D

[fareastwarriors]

Warren Buffett teaches students unforgettable lessons

 

http://finance.yahoo.com/news/warren-buffett-s-master-class-005532745.html#

[WneverLOSE]

Found this great interview with Warren that I have never seen before, I highly encourage you to take a look.

One question I have for you, at 41:20 I can't understand buffett's answer to the question if berkshire hathaway stock is cheap, can someone help me ? (Probably because english isn't my native language I can't understand)

 

[John Hjorth]

"The businesses it [bRK] owns is worth more than its [bRK's] market price"

[scorpioncapital]

Found this great interview with Warren that I have never seen before, I highly encourage you to take a look.

One question I have for you, at 41:20 I can't understand buffett's answer to the question if berkshire hathaway stock is cheap, can someone help me ? (Probably because english isn't my native language I can't understand)

 

 

Yes, he pretty much said it was a buy in 2012 when it was 80 or so per share.

 

 

[LongTermView]

One question I have for you, at 41:20 I can't understand buffett's answer to the question if berkshire hathaway stock is cheap, can someone help me ? (Probably because english isn't my native language I can't understand)

 

The question was whether it was a buy.

 

Like John Hjorth and scorpioncapital pointed out, Buffett said the following which was pretty much saying yes indirectly:

Well, the businesses it owns are worth more than the market price.  But that's true of other businesses too.

 

I think Buffett's answer was better than just saying "yes" directly for several reasons:

1. Buffett didn't know what the stock market would do in the short run.

2. There were other great companies out there that might have been even more undervalued.

[LowIQinvestor]

Getting fairly close to Buffett's buyback price!

 

1.2x book is 7% lower

[marazul]

would love to see this buyback and how aggresive WEB gets.

[scorpioncapital]

Getting fairly close to Buffett's buyback price!

 

1.2x book is 7% lower

 

Only the case if BV doesn't contract. It's a moving target, unlikely to be done instantly. He might wait 3 to 6 months to see the numbers. If the market portfolio of 100b+ drops 10%, reduce the buyback price accordingly.

[marazul]

The 10% decline in the stock portfolio would impact BV by ~5%. In addition, DTL would shrink and that would make the impact less than 5%. Also, earnings from operating businesses and dividends from securities would add to BV. So BRK BV is less exposed to market fluctuations than a couple of years ago, and less than people think imo.

[Charlie]

Always a good news for Berkshire investors when the stock market declines. Buffett recently said he likes the big down days.  :)

I bought more Berkshire today.

[ourkid8]

I also added to my Berkshire position.  I cannot wait for him to announce a bump into the buyback threshold to 1.3x!!!

 

Always a good news for Berkshire investors when the stock market declines. Buffett recently said he likes the big down days.  :)

I bought more Berkshire today.

[John Hjorth]

Personally, I don't expect a rise in the "soft" buy back level anytime soon.

• A lot of liquidity has been earmarked towards the proposed PCP deal.
  
• A part of the liquidity at group level is abroad US, subject to a tax haircut, if transferred to BRK HQ or other BRK US entity.
  

However, I would love a positive surprise.

[jrunner]

I bought more today, too.