Is anyone else getting tired of this folksy act by the Oracle of O? We sure are.
“Oh, those complex derivatives, we leave those to the fancy city-folk. Financial weapons of mass destruction. Exotic. Complex. We leave those to the $3,000 suit investment bankers who we really can’t justify the existence of unless its for us to buy up the most offensively city-folkesque investment bank on The Street. Yeah, we have some derivatives, but they are oh-so-folksy.”
“No, really, they are just index puts we wrote.”
“Well, ok, they are European style options.”
“Well, yeah, so, they have very exotic, customized, collateral requirements. That is, there aren’t really many collateral requirements.”
“No, we don’t have to post collateral in that instance. Yes, that’s unusual.”
“Yeah, they are actually very long dated too.”
“No, not just one. Actually, they are on four different equity indexes.”
“Well, we’ve hedged the currency risk some.”
Look WB, how about you just spit it out: The folksy thing sold well for years, but now its time to just admit you are a savvy player. Stop slapping around Black-Scholes while you have $37 billion in options and a pile of CDS contracts laying around. Then the SEC won’t go demanding more disclosure and force you into big annual report drama.
Buffett Will Give More Information on Derivatives [Bloomberg]
Warren, Put The Pickup Truck Back In The Garage, The Dealership Called. You Have To Go Pick Up The SL
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- Use the Bloomberg command
NH BLG_DEALBREAKER <GO>
to access Dealbreaker
EP: This is just dumb. In 2002 Buffett rightly complained about how a CDS could take down a company–just like what happened to AIG sans the 150 billion US bailout.
These are something like 1300 S&P 500 euro puts in 2018. Does anyone think what happens to equities in 2008 has much of an effect of 2018 prices?
Of could the BS model thinks so because it applies the risk free rate to the current index levels.
But seriously, do you really think what the index did in 1999 has any effect on the prices now????
Please………….
Ha. Face it, his avuncular persona is genius – pure genius. He can do pretty much whatever he wants – put on positions in billions of options, extract ridiculous terms from GS and GE, buy firms like CEG on the ultracheap – and everyone loves him. Brilliant!
Of course having $28B sitting in cash doesn’t hurt…
First.
Regardless…Buffet still has his shit together which is more than can be said for most of the street’s big shooters.
$50 shake shack gift card says he’s more likely to provide the additional information on his derivatives than Vik is to provide a coherent plan on how he’s gonna pull Citi out of the ditch (long term) even with the latest taxpayer handout.
EP, you are barking up the wrong tree this time.
EP, you are barking up the wrong tree this time.
Funny thing is, a lot of people consider the Black Scholes model to be a bit folksy, what with its log-normal distribution.
I have no idea why though; I think puts are tools of the devil. You’re a witch, ep! A witch!
he is short long dated vol through index and variance swaps. its a trade that is in keeping with his stated objectives- earning current income and terming out risk. dont write about things unless u understand the basic principles (at the very least), u just sound like another idiot blogger who likes to take shots from the cheap seats
he is short long dated vol through index and variance swaps. its a trade that is in keeping with his stated objectives- earning current income and terming out risk. dont write about things unless u understand the basic principles (at the very least), u just sound like another idiot blogger who likes to take shots from the cheap seats
he is short long dated vol through index and variance swaps. its a trade that is in keeping with his stated objectives- earning current income and terming out risk. dont write about things unless u understand the basic principles (at the very least), u just sound like another idiot blogger who likes to take shots from the cheap seats
Yeah ep, this is dumb. The dude has been grubbing money even before my dad was born and he hasn’t lost his marbles (yet).
Don’t ridicule the guy just for the sake of it.
EP is absolutely correct. Financial weapons of destruction my ass. Do you think he can spell hypocrite?
Oh, and CDS only helped take down AIG because they had to stump up margin on their deriv contracts once their CDS widened, which makes sense. Otherwise they wld have gone bust and all their counterparties would have been exposed to a much greater extent. Sure you can argue “but they wouldn’t have gone bust otherwise” but 1. you don’t know that, and 2. they knew the terms when they entered the contracts.
What took AIG down was writing sh*tloads of CDS (so long the underlying) without properly hedging themselves.
Don’t hate tha game hate tha playa
The guy is overrated. Can’t stand people who hang on his every word.
I agree with EP, on this one. Put a fork in him, he is done.
Warren is the bottom, when we hear that Berk had to adjust its holdings to provide liquidity for CDS contracts, we will know its a market bottom worth spanking…
It might be time to put WB out to pasture… let Becky Quickly service his needs, and he can take up painting cows or something.
His time behind the wheel of a large fund is about over. Shit, we don’t let grampa use the remote control anymore, why would anyone trust the old leach?
-Not SPODE
@11 Stop kissing ass. His comment about derivatives was meant towards people who had no clue about what they were getting into and cared only for short term profits (aka bonuses) which was most of Wall St. BRK is his baby and he’s too self-aware to let a “bet” like this bring it down. He’s been in the insurance business, oh only for the last 40 years.
#13: leech? lech? letch? SAY IT ! SAY IT !!
Actually, EP, you are barking up exactly the right tree, notwithstanding whatever WB’s ubiquitous fanboys say (apparently multiple times).
Go ahead: bite him in his goddamn, tiresome, folksy ass.
TED
What about the freaks that try and get a front row seat at the BRK meeting…. Oh – maybe we’ll see him at the DQ & get a woody!
Very smart guy – no question. but @ 12 is correct – overrated!
He is only trying to make people comfortable. He has no need to show off and blow past most of the rest of us. But you have to hear all he says and some times he does not say it all at one time. Care.
@14. I’m sure you’ve got a great insight into what he was thinking 6 years ago.
“”We try to be alert to any sort of megacatastrophe risk, and
that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives
contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,
however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are
potentially lethal.”"
Ah well, at least he didn’t add to the burgeoning mass of *uncollateralized* derivs :-)
@19 Way to cherry pick what you like from his writings. Look, there’s no way he could have anticipated the trajectory of this decline but overall his thesis for writing insurance (that’s all this is, if you want to call it the d-word, go ahead) remains the same:
“Berkshire, in contrast, happily accepts volatility, just as long as it carries with it the expectation of increased profits over time. Furthermore, we are a Fort Knox of capital, and that means volatile earnings can’t impair our premier credit ratings. Thus we have the perfect structure for writing — and retaining — reinsurance in virtually any amount. In fact, we’ve used this strength over the past decade to build a powerful super-cat business.”
Substitute “reinsurance” with “puts” and voila! Anyway, I’m done arguing with numbskulls whose own firms need capital injections from the government to stay solvent.
“Berkshire, in contrast, happily accepts volatility, just as long as it carries with it the expectation of increased profits over time.”
Congratulations – you’ve discovered Buffett’s secret. The expectation of increased profits over time, lol. Genius indeed.
Also, this isn’t insurance, it’s hedging.
And who needs a capital injection??
Does anyone know when these puts were written? It looks to me like a smart trade for an insurance company smart enough to do their due diligence and plan for all scenarios between writing date and expiration. I am reaffirmed by Buffet’s statements in writing that he won’t look at the PL on these trades until expiration.
So he is short the vol at quite high levels (depending on when written).
MTM is not an issue.
Long the market.
Smarter than the buyer (who seems to have been an idiot not smart enough to realize that the american’s were worth a lot more than the europeans without collateral calls)
He is a hypocrite, using derivatives to speculate on realized vol just like the people he has bashed. At best you can say is trying to arbitrage the theta of his position vs. his personal theta (time to expiration).
@20 I need a job, can you help
@ 13
Pretty strong opinions for an unemployed has been that never really was.
Maybe you should short the stock then Captain Hot Stuff?
The reason why rumors, speculation, and requests for additional information don’t cause Berkshire’s shares to collapse like so many banks is that Berkshire has a credibility shield. This shield stems principally from the following:
1. Berkshire’s share price is supported by sustainable business that actually provide value (as opposed opaque business models reliant upon accounting gimmicks and abstract mathematical calculations)
2. Warren has a track record of being correct over the long term, even if certain decisions or opinions have made him unpopular in the short term. Most of Wall Street on the other hand has a track record of lying in the short term and hoping they can cash out before the wheels come off the wagon in the shorter term (Wall Street knows no long term but instead manages for tomorrow, this week, or this quarter, etc.) Wall Street would recommend long positions in dog shit if it beat the S&P for two consecutive quarters.
This is why Wall Street can’t pull itself out of the current crisis of CONFIDENCE and must rely on the government for handouts. Unfortunately, this administration also lacks credibility. Hard to lend out what you don’t have in the first place.
Eventually this ship will right itself when the liberal media sickens of reporting the downside of all things financial (which will suspiciously coincide with the change to a Democratic administration) in favor of reporting how miraculous and reliable the rising of the sun is each morning. Americans for their part will realize that they’ve got to bank somewhere and rally behind the remaining banks that haven’t been crushed on the erroneous assumption that the respective management teams of the remaining institution must be the least incompetent. Then Wall Street will go back to being a bunch of narcissistic assholes talking about “fly over states” until its unmitigated greed, unchecked stupidity, unbridled shortsightedness and unadulterated conflicts of interest cause another debacle, albeit a less protracted and less severe one…probably around 2015. It’s the circle of life.
Bottom line: Buffet’s credibility > Wall Street’s + the Bush Administration’s.
Just a little tired of watching retarded little pick pockets question the integrity and intelligence of someone who was successful and did it the right way (comparatively speaking).
Get down,
HH
He got usury-like rates from a bunch of Jews. Need I say more?
23. I would disagree 100%. Buffett has done his due diligence, understands the risks (both model and real world), and has put on a smart trade. (smart does not always mean profitable but still smart).
He has criticized derivatives when used by idiots who do zero due diligence. The list of examples is too numerous to list but the best example may be the selling of CDS instruments by virtually everyone and thinking the option premium was free money.
And FYI – you don’t need to define theta on this board. And your “speculate on realized vol” statement is wrong as well. He is doing nothing of the sort.
When EP becomes as rich as WB, then I’ll listen to her. What an infantile post.
27. He put on an uncollateralized directional bet on foreign equity indices, not sure how that can be considered anything other than speculation on realized volatility.
Funny you said “selling of CDS instruments by virtually everyone and thinking the option premium was free money”, exchange puts for CDS and that is exactly what Buffett had done. Just that his followers think because he has been successful that he is smarter than everyone else and won’t be wrong. That may be the case but doesn’t mean he isn’t doing the same thing and is a hypocrite.
Am I missing something or is the writer (ep) not using sarcasm to imply WB acts like an idiot to rip off all the “smart” bankers but still let them think they walked away with a home run deal and will keep coming back for more?
Said another way, 28 you are dumb.
@28. So listen to the richest person in the room.
Go home, seriously, go home.
Realized volatility has nothing to do with where the market is in 2019. To boot, Buffett has specifically stated he cares nothing about realized volatility on this trade. Go read your options 101 book again, chapter 5.
EP is bad at sarcasm, satire, comedy, anything else that’s supposed to make you laugh, unless she’s writing subtitles to a Hitler movie. Now, that’s funny stuff. It’s so funny that some jerk ripped her off.
@30
Agreed. EP is using sarcasm here…a fact that has apparently eluded the grasp of many of this thread’s posters.
@29 If you are such a smart-ass, why do you even care? Go plot your realized vol and theta and figure out a way to blow yourself up (or preferably your clients) with your next great trade.
And yeah, “followers” sounds cult-like, I prefer “partner-shareholder”.
@Headless Horseman,
While I don’t have his track history due to youth at my end, I am up double digits in my fund YTD, while retaining my results from the last 4+ years. I have a negative beta since inception while enjoying a double digit annualized alpha over the S&P since inception.
I am mocking the old man because everyone deserves it, when they make a major mistake. Its how we, as a larger group learn from a specific persons mistakes. I don’t know about you, but I try to learn from other peoples mistakes just as much as I try to learn from my own.
He, of all people knew that the system was over leveraged and going to experience a major pull back. He raised cash for years, just for this event, and then he goes and sells puts like a drunk sailor on leave and takes on CDS exposure in size?
So, here is my question to you. What is the impact to Berks balance sheet if the DOW goes sub 5k in the next 18 months and stays low for a few years? A few years is 5 – 10 years of zero actual growth.
The great crash in the 30′s was an 89% or so pull back in the Dow. If we apply the same 89% rule from the new Highs of 14,000 and we have a lost decade or so of back filling, where does that leave Berkshire in 2018? Do the math if the markets tank another 50% from here.
Seriously, the market sucked from its top in 29 until the 1950′s in reality. If we have a 75% pull back with a listless market do to a growing volume of Boomers hitting their retirement cycle, who the fuck is going to want to buy equity’s? We are returning to an era of income based assets not equity growth.
The real top in the market in 2000 is still playing itself out, we have a long ways to go to unwind the carnage done in the credit markets of late.
Equities after the great crash were valued on their stability of dividends. They will return to a like metric again.
Discounted cash flow models are trashed and now its discounted dividend model time. T-Boon was the commodity guy until he blew up completely. WB is the insurance guy until he writes a policy he can’t afford, then he is going to be someone who stuck around to long. Like any good boxer, your only as good as your last fight. The rest is marketing.
The reality is that we can and will see additional extreme movements as we work our way through this economic cycle, and being short Vol in Billion dollar size is about as stupid of a decade long trade as could have been written.
Get your head back up on your shoulders,
-Not HH
yep, 36, you are exactly the type guy Buffett has printed money trading against the last 90 years. (He’s 110 right?)
His max downside stated over and over is 35.5 billion if the indexes go to zero. (may be conservative to say max because foreign exchange could increase or decrease this) And this is exactly the point, WB considered the case the indexes go to zero and planned for it.
I bet that BS (by definition) or VAR model you are using doesn’t even begin to factor that possibility in. Even during stress testing.
Warren is definitely overrated – who does he think he is being one of the wealthiest men in the world and at investing of all things!! Using strategies that consistenly make him money for longer than most of us people have been on this planet.Here is a guy who will never lose a job ’cause he created his own job.
Given this is a losers blog for people in finance we should all be lighting candles to a poster of WB’s picture and praying to him. But dont let the candle burn all the way down, blow the candle halfway so you can use the rest to stick it up your ass.
@ 36
Props on your fund…so far.
DJIA sub 5k? It’ll hold the line at 7.5k through year’s end (assuming GM is told to take a long walk off a short pier) and be back above 9K by 2011.
Our current predicament has little to do with the great depression (so far) other than the lack of confidence in banks.
The boomer arguement? Really? Most boomers don’t have enough socked away to switch to an income strategy even if munis were to yield 10%. Never more so than if your decade of back filling and listless growth holds true. Plus there’s an awful lot of cash being held by institutionals right now that are just waiting for some stability as a green light for deployment.
I’ll concede your point that DCF models will be less relevant than has recently been the case, but equity yields won’t be sufficient to fund the retirement needs of the boomers, corporations will still think they can spend free cash better than shareholders in addition to wanting to avoid the management stigma associated with large dividends.
Lastly, even if your predictions of sub $5K DJIA and a decade of stagnation come to pass…we’ll all have bigger issues to worry about than what Berkshire is doing (and Berkshire will still have enough in liquid assets to remain solvent…which is more than can be said for most of the fortune 500 under that scenario).
All in all, an interesting perspective with which I respectfully disagree.
Time will tell,
HH
Just bc Buffett isnt posting collateral on the trade doesnt mean GS (or someone else) wont have to. Berk has such great credit/cash flow blah blah. I dont care if John the Baptist is my counter-party – if the SP 500 goes to 650 or 700 on the WB puts, someone is posting collateral. And lots of it. That is the real issue.
Is it just me or does the picture make Warren look like he’s about to crawl into a fetal position?