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Interview with Alice Schroeder


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Curious if anyone has knowledge of this this:

 

Those equity index puts that created issues with the rating agencies. I think the reason he had difficulty with those is that he knew immediately how to price them and that the odds were very high that they would make money for Berkshire, if looked at on their own as contracts.

 

The other elements that were subjective — the way they would create short-term volatility in the balance sheet; the way hedgers might respond; the regulating agencies — these didn’t come into the equation because the trained, automatic part of his mind fastened on how much money could be made and the probability.

 

If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it.

 

Can anyone fill in more detail, especially regarding how Buffett was unable to pounce in 2008 due to negotiations? Was he unable to invest cash because of these puts on the B/S which would somehow affect BRK's credit/collateral reqs?

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Wow, that's novella-length. I'm digging in, thanks!

 

 

Update: I think I already read this one, but it was probably around the time it was released in 2010, so I've forgotten many of the details and flavor of it. Good to revisit.

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nice read, LC nice find, i thought this was interesting:

 

Miguel: Do you think there is particular reason for his focus on consumer and financial companies?

 

 

Alice: Yes. With financial companies you have leverage that can be controlled, “regulatory oligopoly,” and trust. Insurance float is only one example of leverage. The spread on “float” in banking can be controlled too, if you lend intelligently. Banking is a nice little business for the few who are willing to do it in a vanilla manner. “Regulatory oligopoly” is the entrenched competitive position that’s, in effect, provided by your regulator and its rules. It can give you quite a few, or few hundred, extra basis points of return.

 

I think Buffett’s consumer plays have been overrated as a theme. He likes good companies with enduring business models. Many happen to have been consumer companies. He got intrigued by the idea that a brand could be a very enduring asset. Then he was surprised at how quickly the value of brands eroded in the 1990’s. Brands with true “moats” are exceedingly rare. Of course he wants one when he can get it, but these companies usually also are expensive.

 

 

....

 

If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it.

 

 

....

 

Lastly, investing is not a religion. It’s not like you have to follow a creed. Warren will buy things that are simply cheap. He’s pragmatic. There’s no rule that he has to be absolutely consistent. If he sees something that he thinks is undervalued he’ll occasionally buy it, even if it’s a Korean dairy company. Then he’ll sell it. Everything doesn’t have to fit into a perfect framework.

 

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Great link.  Long but quite short compared to the snowball book.  I like this quote:

 

He is being forced to accept lower returns than smaller investors simply by virtue of his market cap limitation. He’s given fair warning of this often enough, so it shouldn’t surprise us now. He’s often spoken nostalgically of how much better he could do running a smaller portfolio.

 

Therefore, let’s invert the situation. If you are running a smaller portfolio, the stocks he owns are interesting to consider, but not necessarily the first place I would look for investment ideas.

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If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it.

 

I think this quote is very good. As it once again reinforces my idea of put options being very dangerous and as I see it cash is always 90% better alternative. As one should just wait until an opportunity arises and then invest. Be it 10 years or not cash is just so much simpler then theses puts. Rather sleep tight and wait opportunity's always arises some times(hopefully not ten years ala Munger).

Thanks for bringing it up LC     

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http://seekingalpha.com/article/235292-behind-the-scenes-with-buffett-s-biographer-alice-schroeder

 

I encourage this read. It may seem long but well worth it. Alice makes it quite clear how ruthless Warren can be and how well-versed he is in manipulation, if you want to call it that.

 

*From 2010 as Liberty pointed out. Thanks :)

 

Posted this on reddit a day ago, I am guessing you saw it there.

 

Miguel Barbosa, who did the interview with Alice Schroeder, does fantastic work.  He writes at www.klevr.org and www.interviewsforinvestors.com and occasionally at www.simoleonsense.com

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Didn't his inability to invest more come from the fact that he was on the hook for those puts if things got worse?

 

How does an individual get hurt if they just buy some OTM puts to protect their portfolio for when the market crashes? If really wanted, It can be a reasonable hedge (for a fraction of the portfolio) when you go for stocks that have a long way to fall in a market decline, think Linkedin, amazon, .. but a basket approach is probably wise. I prefer this with 100% long exposure compared to 60-80% long and 20-40% cash. Generally I wouldn't hold cash or put options and just go 100% long but US market level is slowly making me nervous.

 

http://seekingalpha.com/article/235292-behind-the-scenes-with-buffett-s-biographer-alice-schroeder

 

I encourage this read. It may seem long but well worth it. Alice makes it quite clear how ruthless Warren can be and how well-versed he is in manipulation, if you want to call it that.

 

*From 2010 as Liberty pointed out. Thanks :)

 

Thanks. I'd bet that almost anyone at a certain corporate level (upper management) is good at manipulation, part of the game. Knowing this it is not surprising that he is as well.

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Guest deepValue

Great interview; I hadn't seen this before.

 

btw:

 

-"Warren is extremely precise and literal in what he writes and says"

-"reluctant to criticize anyone and hypersensitive to criticism himself"

-"He’s got a keenly honed sense of justice"

-"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness"

-"a great synthesizer and especially strong at pattern recognition"

-"Repetition doesn’t bore him the way it bores other people."

-"his emotional pendulum swings in a very narrow arc"

-"prodigious memory"

 

You could probably say all the same things about Michael Burry.

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This is the first time I've heard of Barbosa and I really liked him.  He asks good questions and it seems like he knows when the audience is going to want more explanation.

 

I am with you on market valuations, tombgrt.  I also have a couple quotes rolling around in my head.  One is from Buffett in '99 when the market was at 40x earnings and he said that if he was running a small portfolio he'd be fully invested.  The other is from Walter Schloss who said he had  been fully invested his entire career.

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I am with you on market valuations, tombgrt.  I also have a couple quotes rolling around in my head.  One is from Buffett in '99 when the market was at 40x earnings and he said that if he was running a small portfolio he'd be fully invested.  The other is from Walter Schloss who said he had  been fully invested his entire career.

 

Where are these gems from?

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Unfortunately I have a very un-Buffettesque memory and I am not sure where I saw those quotes.  Google "Walter Schloss archives" I think the site was called something like that.  I remember that Schloss' point was that he felt safer holding stocks than holding cash, and Buffett's point was that he'd have an easier time finding ideas if he was running a smaller portfolio. 

 

On the other hand, Schloss  shut down his fund in 2001 because he couldn't find any bargains, and Buffett advises us to be fearful when others are greedy.

 

FWIW, a lot of value guys are starting to get a little worried about valuations.  I believe Chou said he's worried, Klarman said the same and returned cash to investors, Oceanstone is sitting on like 80% cash right now or something.  It seems like most of the OTC stocks I look at have doubled and are above book value now.  There are still bargains around but they require more ability to spot.  If you can understand banking or analyze the competitive landscape of the telecom industry in Alaska then you can still find things, but if you are just looking for net nets and super low pe and that kind of thing, there is  less to pick from than recent years.  The other option is to go somewhere outside the states where quantitative bargains still abound, such as Japan.

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I am with you on market valuations, tombgrt.  I also have a couple quotes rolling around in my head.  One is from Buffett in '99 when the market was at 40x earnings and he said that if he was running a small portfolio he'd be fully invested.  The other is from Walter Schloss who said he had  been fully invested his entire career.

 

Where are these gems from?

 

http://www.businessweek.com/1999/99_27/b3636006.htm

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Great interview; I hadn't seen this before.

 

btw:

 

-"Warren is extremely precise and literal in what he writes and says"

-"reluctant to criticize anyone and hypersensitive to criticism himself"

-"He’s got a keenly honed sense of justice"

-"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness"

-"a great synthesizer and especially strong at pattern recognition"

-"Repetition doesn’t bore him the way it bores other people."

-"his emotional pendulum swings in a very narrow arc"

-"prodigious memory"

 

You could probably say all the same things about Michael Burry.

 

Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with.

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Great interview; I hadn't seen this before.

 

btw:

 

-"Warren is extremely precise and literal in what he writes and says"

-"reluctant to criticize anyone and hypersensitive to criticism himself"

-"He’s got a keenly honed sense of justice"

-"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness"

-"a great synthesizer and especially strong at pattern recognition"

-"Repetition doesn’t bore him the way it bores other people."

-"his emotional pendulum swings in a very narrow arc"

-"prodigious memory"

 

You could probably say all the same things about Michael Burry.

 

Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with.

 

That's what I was thinking. 

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This is the first time I've heard of Barbosa and I really liked him.  He asks good questions and it seems like he knows when the audience is going to want more explanation.

 

I am with you on market valuations, tombgrt.  I also have a couple quotes rolling around in my head.  One is from Buffett in '99 when the market was at 40x earnings and he said that if he was running a small portfolio he'd be fully invested.  The other is from Walter Schloss who said he had  been fully invested his entire career.

 

 

Warren did quite well in 1999 -- the  early oughties buying REITS that were yielding 10%+ FFO.  :)

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I am with you on market valuations, tombgrt.  I also have a couple quotes rolling around in my head.  One is from Buffett in '99 when the market was at 40x earnings and he said that if he was running a small portfolio he'd be fully invested.  The other is from Walter Schloss who said he had  been fully invested his entire career.

 

Where are these gems from?

 

http://www.businessweek.com/1999/99_27/b3636006.htm

 

 

That was a gem. Thanks for posting.

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Great interview; I hadn't seen this before.

 

btw:

 

-"Warren is extremely precise and literal in what he writes and says"

-"reluctant to criticize anyone and hypersensitive to criticism himself"

-"He’s got a keenly honed sense of justice"

-"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness"

-"a great synthesizer and especially strong at pattern recognition"

-"Repetition doesn’t bore him the way it bores other people."

-"his emotional pendulum swings in a very narrow arc"

-"prodigious memory"

 

You could probably say all the same things about Michael Burry.

 

Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with.

 

That's what I was thinking.

 

Asperger's Syndrome is an obsolete diagnosis now rejected as too vague. 

 

I once sat in a TQM training session in 1999 and watched an audio video feed of Buffett,  Gates, Ted Turner, Richard Branson and Steve Case.  After a few minutes, my wife poked me in the ribs and said, "Case is the only one who is normal".

 

She was right. The other four were hyper excitable, bubbling over with synergistic insights they were eager to share as they lighted up with voltaic energy in the aura of their combined mental insights. Each one of the four who weren't normal stuttered slightly in restrained eagerness to share golden nuggets of wisdom. 

 

It definitely wasn't normal, but it wasn't pathological either. That must have been what it was like when General Leslie Groves and Robert Oppenheimer confined the greatest minds in theoretical and experimental physics on the mountain plateau of Los Alamos, NM until they hatched the bomb. :) :(

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Correct, 'Asperger's' is now recognized as being on the Autism spectrum of disorders.

 

Does anyone have a link or copy of Schroeder's PaineWebber report of BRK? I'd love to see her methodology in-depth. Being...11 years old at the time I didn't quite jump over the other kids in the class to get a copy from my local broker :D

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Great interview; I hadn't seen this before.

 

btw:

 

-"Warren is extremely precise and literal in what he writes and says"

-"reluctant to criticize anyone and hypersensitive to criticism himself"

-"He’s got a keenly honed sense of justice"

-"[susie] enabled him socially to overcome his shyness" and Dale Carnegie, "hard work in the social area to overcome his natural awkwardness"

-"a great synthesizer and especially strong at pattern recognition"

-"Repetition doesn’t bore him the way it bores other people."

-"his emotional pendulum swings in a very narrow arc"

-"prodigious memory"

 

You could probably say all the same things about Michael Burry.

 

Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with.

 

That's what I was thinking.

 

Asperger's Syndrome is an obsolete diagnosis now rejected as too vague. 

 

I once sat in a TQM training session in 1999 and watched an audio video feed of Buffet, Gates, Ted Turner, Richard Branson and Steve Case.  After a few minutes, my wife poked me in the ribs and said, "Case is the only one who is normal".

 

She was right. The other four were hyper excitable, bubbling over with synergistic insights they were eager to share as they lighted up with voltaic energy in the aura of their combined mental insights. Each one of the four who weren't normal stuttered slightly in restrained eagerness to share golden nuggets of wisdom. 

 

It definitely wasn't normal, but it wasn't pathological either. That must have been what it was like when Leslie Groves confined the greatest minds in theoretical physics on the mountain plateau of Los Alamos, NM until they hatched the bomb. :) :(

 

It has been rejected and now the official diagnosis is just "Autism" -- of course, that's a spectrum so it is vague.  The idea of Asperger's was just "high functioning Autism".  We always understood that distinction before the term "Asperger's" was thrown out -- it's too bad, because at least before it was rejected it was implicitly understood to be "high functioning" -- now it takes extra words to explain that to people

 

My daughter was diagnosed with Asperger's 6 years ago.  While I'm not the world's expert on it, I've given it a good deal of thought.  You can't put her in the room with other Autistic children and say "yeah, they all have the same thing". 

 

She's not the only one in the family to have similar traits, but we wanted the diagnosis so that we could get her an "IEP" in the public schooling system.  Now she gets a lot of help from the public school that she can't get without the diagnosis. 

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Guest wellmont

Curious if anyone has knowledge of this this:

 

Those equity index puts that created issues with the rating agencies. I think the reason he had difficulty with those is that he knew immediately how to price them and that the odds were very high that they would make money for Berkshire, if looked at on their own as contracts.

 

The other elements that were subjective — the way they would create short-term volatility in the balance sheet; the way hedgers might respond; the regulating agencies — these didn’t come into the equation because the trained, automatic part of his mind fastened on how much money could be made and the probability.

 

If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it.

 

Can anyone fill in more detail, especially regarding how Buffett was unable to pounce in 2008 due to negotiations? Was he unable to invest cash because of these puts on the B/S which would somehow affect BRK's credit/collateral reqs?

 

I don't buy this at all. buffett invested $10s of billions in that period. He added so much value...He bought Burlington in late 2009. brk had no need to borrow.

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Guest wellmont

If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it.

 

I think this quote is very good. As it once again reinforces my idea of put options being very dangerous and as I see it cash is always 90% better alternative. As one should just wait until an opportunity arises and then invest. Be it 10 years or not cash is just so much simpler then theses puts. Rather sleep tight and wait opportunity's always arises some times(hopefully not ten years ala Munger).

Thanks for bringing it up LC   

 

the put options were never dangerous. He takes money In and invests it. And if he loses, which was highly unlikely, he would have paid way down the line, a fraction of the net worth of the company. the media had a hissy fit about them. And that was so annoying that he probably wishes he never did it. Because it was annoying when people who did not understand what he was doing had a platform to misinform. The put options were safe because he knew what his total exposure was when he wrote them.

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If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it.

 

I think this quote is very good. As it once again reinforces my idea of put options being very dangerous and as I see it cash is always 90% better alternative. As one should just wait until an opportunity arises and then invest. Be it 10 years or not cash is just so much simpler then theses puts. Rather sleep tight and wait opportunity's always arises some times(hopefully not ten years ala Munger).

Thanks for bringing it up LC   

 

the put options were never dangerous. He takes money In and invests it. And if he loses, which was highly unlikely, he would have paid way down the line, a fraction of the net worth of the company. the media had a hissy fit about them. And that was so annoying that he probably wishes he never did it. Because it was annoying when people who did not understand what he was doing had a platform to misinform. The put options were safe because he knew what his total exposure was when he wrote them.

 

She's saying that the put options are the reason why Berkshire lost its AAA credit rating, which affected the ability of its reinsurance business to get good rates.  With a AAA rating, his reinsurance units could have written a lot of business and he could have invested all of that float.

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