Buffett: Our Worst Year Ever
Wow, that’s quite a sobering epitaph — worst year in the long and previously outperforming existence of Berkshire Hathaway.
This is amazing stuff:
“Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.*
The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear. “
The full report is below . . .
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Sources:
BRK: 2008 Annual Report
http://www.berkshirehathaway.com/letters/2008ltr.pdf
Berkshire to Post Annual Letter
DAVID GAFFEN
WSJ, FEBRUARY 28, 2009, 8:04 A.M.
http://online.wsj.com/article/SB123575572935295811.html
Berkshire Results May Be Worst Ever, by Buffett Gauge
Erik Holm
Bloomberg, FEBRUARY 27, 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=aM6K3SO2VLMo&
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February 28th, 2009 at 8:27 am
Why doesn’t Buffet invest in golf courses? You’d think with all the ‘sturm und drang’ about golf courses coming out of the Angry ‘Let’s create a media problem’ Right, they were essential parts of the economy. If all the golf courses in the world were turned into rutabaga farms, it would be a rounding error on economic activity and more people might eat. Laughable foolishness.
February 28th, 2009 at 8:28 am
Bill Miller has lost an arm and a legg the past few years too
After a tumultuous 2008, can Miller make a comeback?
Chetan Modi | 05/02/2009 09:53 | E-mail Article | Permissions/Reprints | Bookmark Article
The name Bill Miller might not be instantly recognisable amongst UK retail investors but in the US he is as prominent as Anthony Bolton is in the UK. Miller is famed for beating the S&P 500 Index for 15 consecutive years while at the helm of the US-sold Legg Mason Value Trust fund but investors in the UK are more likely to have familiarity with the manager through Legg Mason US Equity which is sold here in the UK and is a near-clone of Value Trust. Although Miller’s prominence grew and he gained ‘star manager’ status through his long-term winning streak versus the index, more recently, he has become known for suffering a staggering reversal of fortune.
During the past three calendar years the Legg Mason US equity fund has ranked in the bottom decile of its Morningstar US Large-Cap Blend category. If an investor held Legg Mason US Equity since its early 2003 inception, he would currently be nursing a loss of 4.8%. However, 2008 was particularly painful as the fund lost a staggering 42.4% in GBP terms. Miller has also undone most of his previous good work at Value Trust and investors who held the fund over a period of ten years to the end of 2008 would have lost 4.21% (in USD terms), compared with the loss of 1.38% posted by the S&P 500 Index.
February 28th, 2009 at 8:45 am
Most people would kill for (-9.6%)………..For an enterprise of this size and diversity in this climate it’s chump change…..In other words Uncle Warren does it again……
February 28th, 2009 at 8:54 am
They say if you had a room filled with monkeys, given an infinite time period, one would randomly produce the works of Shakespeare…this exemplifies chaos theory, randomness, black swans, etc.
I have been thinking it is possible that Mr. Buffett is the “black swan” of investors…a guy who, given the odds of one occurring, just happened to be the monkey who produced Shakespeare…he had help, having lived during a massive bull market…and once he achieved a certain celebrity, it was a positive feedback system…Buffet buys something, so the sheeple all run out and mimic him (reminiscent of Cramer).
The most surprising aspect is that everything I read from Buffett from like 2000-2005 made me think he saw this coming…his famous short on the dollar…his statement that derivatives were “financial WMDs”…so how the hell does he put up his worst year ever?
February 28th, 2009 at 9:02 am
red flags should be appearing. the emphasis on justification of his derivative positions is astounding. he and chuckie seem way overconfident that all is clear regarding all the premium sales.
February 28th, 2009 at 9:06 am
Actually, we have already done that experiment with a million monkeys — all they did was produce the works of Ann Coulter . . .
February 28th, 2009 at 9:10 am
@ottobavs: the -9.6% is BRK’s change in BOOK VALUE, not stock price.
February 28th, 2009 at 9:22 am
Epitaph… really?
February 28th, 2009 at 9:24 am
Kid Dynamite:
Exactly. Investors with Buffett. BRKA 50,300 in January 1998. Now 11 years later 79,000.
Up 57 per cent in 11 years. 5.18 per cent per year.
If you’d bought a 10 year cd you would be ahead of that…
February 28th, 2009 at 9:27 am
If Buffet is the dean of financial/money managers, for many years seemingly incapable of losing money, what do his results say about the idea that there is such a thing as “alpha”?
Making money during good times is relatively easy: Just don’t be stupid. The real difference is whether you can minimize losses in the bad times. As we found out w/ the ibanks and gse’s, it only takes a highly-leveraged outfit a couple of quarters to wipe clean and then some several decades of leverage-juiced profits. Fannie Mae just reported that it lost $59 billion last year, wiping out the previous seventeen year’s worth of profits.
It’s part of why we are re-tracing the stock markets back to the 90′s. Next will be the eighties. I figure the slate will be wiped clean when we get something close to the early seventies after the “nifty fifty” imploded.
February 28th, 2009 at 9:30 am
for the remarkably lazy and, thereby, Ignorant among us:
ep·i·taph (p-tf)
n.
1. An inscription on a tombstone in memory of the one buried there.
2. A brief literary piece commemorating a deceased person.
——————————————————————————–
[Middle English, from Old French epitaphe, from Latin epitaphium, from Greek epitaphion, from neuter of epitaphios, funerary : epi-, epi- + taphos, tomb.]
——————————————————————————–
epi·taphic adj.
The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2003. Published by Houghton Mifflin Company. All rights reserved.
——————————————————————————–
epitaph
Noun
1. a commemorative inscription on a tombstone
2. a commemorative speech or written passage [Greek epi upon + taphos tomb]
Collins Essential English Dictionary 2nd Edition 2006 © HarperCollins Publishers 2004, 2006
——————————————————————————–
epitaph
1. an inscription on a monument, as on a gravestone.
2. a short piece of prose or verse written in honor of a dead person. — epitaphial, epitaphian, epitaphic, adj.
See also: Death
-Ologies & -Isms. Copyright 2008 The Gale Group, Inc. All rights reserved.
see def. 2 #2.
IOW, yes, Really.
February 28th, 2009 at 9:34 am
“Fear led to business contraction, and that in turn led to even greater fear.”
_______
This statement puts the cart before the horse. In our current situation, fear is a sane and reasonable reaction to real events – not the catalyst that created the reality. Of course, bad decisions are frequently made from a position of fear, but the fear itself does not create the reality.
The bottom line is that we have a booby-trapped global debt that cannot be repaid, and which is so entangled with counter-party liabilities that to pull any thread might strangle the very one doing the pulling.
Alexander’s solution to the Gordian knot might be the only viable way out of our current predicament – if we have the courage to cut the ties that bind.
February 28th, 2009 at 9:40 am
Curmudgeon, as usual, gets to the very essence…
the secret is not to lose money in downturns….
Should be tattooed on every mutual fund advisors forehead…
and if this tells mutual funds anything, it should tell them that funds that have to be invested all the time are set up badly, that they hamstring the advisor needlessly..
February 28th, 2009 at 9:51 am
harold hecuba: First time reading Buffet’s letter? Red flags…
SB: Ever see the positive in anything?
Kid Dynamite and BinT: He’s a businessman not a stock broker!
I love all the I hate WB, must be due to his ability to be better than everyone.
February 28th, 2009 at 10:00 am
@rpd:
Careful, SB has told us repeatedly where he is invested…if you’ve followed it…he’s beaten the pants and the tidy whities off old uncle Warren this year…by a mile…and as Curmudgeon says, if you avoid losing money in a downturn, in time you are king.
February 28th, 2009 at 10:22 am
Thanks for making my point Mark.
February 28th, 2009 at 10:27 am
@Scott F…good one
@rpd..I see lots of positives (buying gold miners in a few years for example), but that wouldn’t make for an interesting blog, would it? When I told people 3 years ago we would have a depression, they called me “negative”…”gloom and doom”…they still do believe it or not. There is a certain inherent optimism that is great…but not when it borders on being an ostrich.
February 28th, 2009 at 10:42 am
@ Bruce
“If you’d bought a 10 year cd you would be ahead of that…”
Could you get a 10-year CD yielding over 5.18% in 1998? One from an issuer that is still in existence?
I dunno. Plus, the tax consequences of money from CDs vs money from capital gains are considerably different.
After-tax returns from that CD would be equivalent to a considerably LOWER return from long-term capital gains. Long-term capital gains are the kind of gains that Warren Buffett aims for.
“… if you avoid losing money in a downturn, in time you are king.”
One must also avoid losing money in upturns. Warren Buffett’s #1 rule of investing: “Don’t lose money”.
Warren seems to have done that pretty well, beating both the S&P 500 AND debt-based indices over the past 40+ years. When any of the bloggers here have returned this performance consistently over that span of time (or even over a mere decade), then they will merit the respect that Warren Buffett has earned.
Making money during a downturn like this is admirable, but it won’t last forever. If the folks reporting big gains over the past couple of years here had made those kind of returns in good times as well, they would be on the Forbes 400 list of wealthiest individuals — of course, I could be wrong and find myself the only poser in a crowd of billionaires.
full disclosure: I do not own any shares in Berkshire Hathaway, and have not (generally speaking) in the past (my bad). I just respect the man’s uncanny ability to perform year after year. I was a big-time doubter a few years back, when he let tons of cash accumulate during a bull market — explaining it by not being able to find suitable investment opportunities — but he has since redeemed himself, although I think he has underestimated the severity of this downturn and could have made better (cheaper) purchases this time around. But then he is a bit better off than me, and has a superior long-term track record, so I’ll just shut my mouth for now and watch him work.
February 28th, 2009 at 10:45 am
SB,
I’d think that ‘Rubicon’ has done been crossed–it Is ‘ostrich’-ism, and one better join-in, or, still, be ostracized.
http://www.thefreedictionary.com/ostracize
http://www.biology-online.org/dictionary/Ostrich
David,
to follow the Treasury’s lead, I’ll throw more good after bad with: nice try..and, note for your future reference that Farlex provides their service at no, net, Financial cost..
February 28th, 2009 at 10:47 am
The financial complexity of Berkshire’s many investments seems to have finally exceeded management’s ability to grasp that complexity.
Berkshire’s non-financial businesses (energy for example) are dominant players that own markets, but you can’t apply the “buy the best of breed model” to Wall Street in a year when Merrill, Lehman, Bear and Citi all blow up. Just my opinion.
February 28th, 2009 at 10:47 am
From the letter:
“Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our
cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the
moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”
We are completely screwed as a country if this continues.
Besides that, the “folksy wisdom” scattered throughout the report is really annoying. “As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist
camp. Juicy targets are everywhere.” Buffet has always written this way, but it seems like he turned it up a notch this year. Maybe I am just being cranky. Shrug.
February 28th, 2009 at 10:55 am
Buffet on derivatives:
“To illustrate, we might sell a $1 billion 15-year put contract on the S&P 500 when that index is at,
say, 1300. If the index is at 1170 – down 10% – on the day of maturity, we would pay $100 million.
If it is above 1300, we owe nothing. For us to lose $1 billion, the index would have to go to zero. In
the meantime, the sale of the put would have delivered us a premium – perhaps $100 million to
$150 million – that we would be free to invest as we wish.”
What a disingenuous example! Who would possibly buy a put contract (insurance) that pays out equal to the premium in the absolute worst case example? What the heck?
“Our put contracts total $37.1 billion (at current exchange rates) and are spread among four major
indices: the S&P 500 in the U.S., the FTSE 100 in the U.K., the Euro Stoxx 50 in Europe, and the
Nikkei 225 in Japan. Our first contract comes due on September 9, 2019 and our last on January 24,
2028. We have received premiums of $4.9 billion, money we have invested. We, meanwhile, have
paid nothing, since all expiration dates are far in the future. Nonetheless, we have used Black-
Scholes valuation methods to record a yearend liability of $10 billion, an amount that will change
on every reporting date. The two financial items – this estimated loss of $10 billion minus the $4.9
billion in premiums we have received – means that we have so far reported a mark-to-market loss
of $5.1 billion from these contracts.”
I like the real life example better. So far Berkshire has taken a massive write down on their derivatives. I’m not saying the contracts will result in a long term loss for Berkshire, but right now they do not look pretty.
February 28th, 2009 at 11:04 am
“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”
- Warren Buffet – 2008 BH shareholder letter
February 28th, 2009 at 11:08 am
@constantnormal…
I still have 175 K of cd’s at 6.75 and 6.5% from what is now PNC bank that was National City that was Provident that mature in 2010 and 2011 that pay monthly into my checking account…some also from Capital One also mature in 2011 that are over 6..
And as I have posted before I am way ahead of Buffett the last decade, and if I can do it, I am sure professional investors have better the snot out of BRKA…
I accept your criticism, but the man is not what his reputation makes him out to be…that was then, this is now.
By the way, in Tennessee, cd income pays no state tax….just so you know..
February 28th, 2009 at 11:12 am
I left Janus in 1998 because they were only making me 5.5% a year on my retirement.
Duh.
February 28th, 2009 at 11:18 am
Buffet’s greatest trade was in the details of the SPX puts he sold – where he doesn’t have to post collateral. INSANE. I doubt anyone would get a deal like this again, but the ramifications (on the bullish side) for Buffet are tremendous. as he said in the letter, he gets to keep the nearly $5B in premiums he took in, and in addition doesn’t have to post margin on the negative $10B mark to market value. THAT is a nice trade.
February 28th, 2009 at 11:36 am
@OnlineBrokerReview:
Buffet just couldn’t help himself. Even if he knew that “derivatives were financial weapons of mass destruction”, he still just couldn’t keep from playing.
He also speaks as if Berkshire Hathaway gets no government help. Baloney. BRK is an investor in both Wells Fargo and Goldman, both beneficiaries of TARP (Goldman indirectly, mostly through the rescue of AIG; Wells directly).
He said after the original TARP proposal failed that the investment he had made in Goldman depended on TARP passage, and he would lose tremendously if TARP failed to pass. Huh?
February 28th, 2009 at 12:03 pm
@ Bruce — congrats — you are doing just fine. You have bested most of the “professional” money managers, who cannot hold a candle to Warren Buffett (witness the large fraction of hedge funds losing even more than the S&P in this downturn). Of course, Warren has different problems than me and thee — like finding buyers and sellers for the size transactions he deals in.
Any thoughts on how you will replace the income stream from those expiring CDs? I can see plenty of high-yielding opportunities, with some upside capital gains potential, but nothing that does not also come with a sidecar of risk attached. I’ve managed to find some local muni bonds (mat 2016) with 6% rates that seem pretty sound. Other than that, I have a mix of money market funds (still my largest allocation), canroys, QID, SDS and calls on QID and SDS (and a reduced assortment of deep-in-the-red stocks).
Worth noting that all of these various strategies differ in their applicability for individuals’ particular circumstances. Someone with a secure, good-paying job (if any of those are still around) has different tolerances and goals from someone who is retired, with their only income coming from the returns of their investments. Someone in the latter camp might well have lacked the tolerance to hold QID (for example) through the wild swings up and down that it took in 2008, or worse yet if they were especially prescient and bought it during 2007 and watched it slide through the entire year. And then we have those with the gift of trading, who can manage their inner demons well enough to day-trade and make money. Most people (certainly me) cannot manage this. The traders have opportunities that are denied to those without this skill. I suspect that Warren Buffett and Charlie Munger are NOT traders, and would lose their shirts if they attempted to operate in that manner.
Different strokes for different folks.
I’ll be looking for you on the Forbes 400 list in years to come.
February 28th, 2009 at 12:05 pm
As a follow up to VennData’s quote of Buffett at 11:04 am….about the importance of “keeping people in their homes”…
Pretty disingenuous stuff coming from the owner of Clayton Homes, which, in turn owns Vanderbilt Mortgage. This dispicable group sells and extends loans on modular homes. These guys are far worse than any of the now defunct subprime operators.
I could outline some examples of a typical Clayton/Vanderbilt transaction with great detail….but it’d probably be a bit boring. If interested, just do a little search on Vanderbilt Mortgage and/or Clayton Homes. The level of despair and helplessness expressed by those who’ve had the misfortune of getting burned by Buffet’s residential real estate outfits is quite sad. Of course, the aggrieved are just working poor in a trailor park so nobody gives a shit, other than to find another way to make a joke at their expense.
Nobody who claims to have the ethics and integrity that Buffet claims he has…. would be associated with, let alone own, Clayton Homes and Vanderbilt Mortgage. Nobody.
And let’s not even get started on what is really a murky relationship between Berkshire’s General Re and AIG….I know I’m being conspiratorial, but something about those transactions still stinks….but of course, this billionaire who was once roundly criticized for not giving away any money to charitable causes because it would “detract from shareholder value” did manage to do an about face right around the time his dealings with AIG were receiveing the most scrutiny…. and he did give a shitload of money to his best friend’s Foundation, so let’s just let it go…..
February 28th, 2009 at 12:38 pm
KidDynamite Says:
February 28th, 2009 at 9:10 am
@ottobavs: the -9.6% is BRK’s change in BOOK VALUE, not stock price
…..Er….did I say it was stock price?…I’m well aware it was his book value….It was still a hell of a performance in the present environment for a business as diversified as his….just look at comparables or even those enterprises like mutual or hedge funds who are much more liquid than what is basically a conglomerate which can’t just jump in an out of massive businesses…..as Steve Barry might also note…….Sometimes?
February 28th, 2009 at 12:40 pm
I love reading the Buffett letters.
One of my takeaways is the part about how his firm is now “uncompetitive” against shaky firms who have government backstops. Indeed, “THAT” is the single largest unintended consequence of all the governmental interference in the marketplace. It would also be a huge unintended consequence of “pre-privatizing” some large banks. You would end up with some “new” large banks that were ultra-healthy relative to other banks that actually survived this debacle.
Losing firms need to go bust and the parts sold to the winners…Keeping the losers on life support or providing massive government backstops creates an artificial playing field and has huge distortional affects on the market.
February 28th, 2009 at 1:01 pm
Steve Barry,
I recommend that you read the The Superinvestors of Graham-and-Doddsville: http://www.tilsonfunds.com/superinvestors.pdf
-Payam Ahdout
February 28th, 2009 at 1:24 pm
@KidDynamite:
In re: the short Put trade….
The fact that he sold a bunch of index puts and collected premium nearer the top of the market is interesting…it was clearly a bad trade, but it was structured well…
But what I really find fascinating and what I really want to know….
WHO DID THAT TRADE WITH HIM?
Who was the prescient counterparty that said: “Yeah, I’m going to shell out billions in premium to guard against a massive collapse in global stock markets.”
I know..I know..I know…the option doesn’t get paid out for many years and Buffetts a genius and things will probably turn around…blah blah blah…but that was a HELL OF A TRADE! That option is worth so much money right now and it can be monetized….
February 28th, 2009 at 1:36 pm
Buffett’s likes to compare the book value decline of Berkshire to S&P 500, but this is an apples to oranges comparison. Berkshire’s stock declined in 2008 by 35%. Much worse than 9.6% book value decline!
Buffett’s trading of CDS is very interesting. We don’t know which companies he writes CDS on, but from the premium amount he mentioned, these must be high spread companies viewed by market as “risky”. Probably in the same class as GE, GS, MS, rather than being a mixture of very bad and very safe companies.
February 28th, 2009 at 2:02 pm
Look guys…don’t make me into some Buffett hater…I’m just skeptical at heart. I don’t give a rat’s ass about him one way or another to debate with anybody for another minute…but i’ll leave you with this. I don’t care what his record is since the 1960s…any investment that loses 46% in 5 months like BRK has, loses any benefit of the doubt and instantly must be questioned as to its basic structure. Why is Buffet the only one who can make such a conglomerate work long term…answer is maybe he can’t. And I’m not piling on when he is down…I actually posted twice last year that he had “jumped the shark”, before the 46% plunge.
February 28th, 2009 at 2:18 pm
Why is everyone here commenting on how Brk is taking on risk for a premium, that’s what they do and have done for years very successfully.
I just hope that I get the chance to add sub $2300 again!
February 28th, 2009 at 2:32 pm
SB: I actually think a conglomerate run by a couple of really smart operators is much better than a basket of separate companies (i.e. DJIA). I’ve said this before and I’ll say it again…Buffett is better “manager” than “investor.” Surely he made some very good investments, but hey…anyone who bought any companies in the 80′s and 90′s did pretty well in that environment of ever decreasing interest rates.
I think the reason why BRK has outperformed over decades is that he TAKES MONEY AWAY from the businesses he owns and allocates the capital in a more efficient way than it otherwise would.
The greatest mistake businesses make is “reinvesting” too much of their cash flow into their business or buying back shares. Almost every business owner has a disposition to believe “their business is great” and has “better prospects” than others. Publicly owned company almost always think their “shares are a good value.” This is all bullshit of course.
Based on the “20/80″ rule, I would say only 20% of the companies out there are “really good” and all the rest of them are mediocre at best or money-vampires at worst. The cold hard reality is that most businesses would be better off just putting their excess cash flow into a CD and not “reinvesting” in the company or expanding business. Warren Buffet, with a more impartial view, decides what to do with the excess cash. He doesn’t let his businesses waste the cash generated, unlike most public companies.
I’m actually surprised he owns any public companies at all….
February 28th, 2009 at 2:44 pm
By the time this is over, buy-and-hold guys are going to be carried out feet first.
February 28th, 2009 at 3:54 pm
jeff matthews as some good stuff on buffett today….
http://jeffmatthewsisnotmakingthisup.blogspot.com/
February 28th, 2009 at 3:58 pm
Andy Tabbo Says:
February 28th, 2009 at 2:32 pm
“SB: I actually think a conglomerate run by a couple of really smart operators is much better than a basket of separate companies”
……Couldn’t agree more….I worked in one for a fair while run by the founding family….Sure they didn’t win all the time….but they won most of the time……As someone above pointed out anyone, even me and Cramer, can make money when the market is soaring…..the challenge is damage limitation when the bus goes off the road as it has in spades at present…..The prism through which most contributors here seem to see everything is the stock or bond markets….If the core operations of a business are sound and they can maintain the cashflow to weather a contraction, they are generally going to emerge stronger because a chunk of the competition has gone away so they will gain market share…….Buffett is heavily invested in a lot of businesses that fulfil this criteria…….and some of these sweetheart preferred deals he’s pulled off with what are basically good businesses are very smart deals.
February 28th, 2009 at 4:09 pm
Andy Tabbo Says:
February 28th, 2009 at 3:54 pm
jeff matthews as some good stuff on buffett today….
……I picked up this quote from the piece you linked the tone of which is generally negative or at least carping.
” Consequently, if our math is correct, Berkshire’s equity portfolio stands at roughly $37 billion as of yesterday’s market close, dead even with its $37.1 billion reported market value at year-end 2008.”
….This apparently is bad……Presumably this is why this guy is blogging and Buffett is the richest man in the world…..sorry but sometimes…..
February 28th, 2009 at 4:11 pm
@Andy Tabbo Says: February 28th, 2009 at 1:24 pm
The fact that he sold a bunch of index puts and collected premium nearer the top of the market is interesting…it was clearly a bad trade, but it was structured well…
But what I really find fascinating and what I really want to know….
WHO DID THAT TRADE WITH HIM?
Probably a big institution who is out there selling short term put options to the scared straight little guy right now as we speak. If someone knew that the markets were going down they wouldn’t have a problem setting up this deal with uncle Warren because they knew they could just free trade the risk on to all the panicky little guys. Assuming you were one or a group of the big institutions that were planning to unload a trailer full of shares at the top of the market you might have a vested interest in setting things up that way. The VIX alone is telegraphing that someone is buying puts like mad. No doubt at least some of those are being done on a calendar spread with kind old uncle Warren far behind the trade somewhere
Cash goes like this (though the trade is created chronologically in reverse):
Little guy and panicked small fund —-> big institution (cashing in on the spread and volatility) ——> Uncle Warren
February 28th, 2009 at 5:10 pm
@OnlineBrokerReview : you are missing his example.
What he did was sell S&P 500 puts with a strike price of 1300, he sold a $1 billion worth. for that he collected a premium of $100-150 million (not sure why he gives a range instead of an exact figure).
His point is that if the S&P 500 goes to zero, he will lose the full $1 billion. If the S&P 500 closes above 1300 at expiration he loses nothing. Anything else, he would have to pay out the difference. In his example, he said if the index is down 10% at expiration, then we would lose the 10% of the $1 billion which is $100 million.
Meanwhile, he takes the premium today and can invest as he wish, making (or losing) money and compounding the gain (or loss) over the next 10 years.
This is no different than anybody selling a naked put on the S&P 500 cash index. We all can do that today, except that we have to put up margin and the CBOE does not offer standardized options that last 10 years.
Of course, in my opinion, selling naked puts is the surest ways to lose money. As Taleb said in his book, collecting pennies in front of a steamroller. One day a “black swan” happens and you end up broke.
In this particular case, Buffett is down huge on his trade. Had he needed to put up margin he would be screwed.
February 28th, 2009 at 7:27 pm
Barry,
Remember when I commented how frazzled Warren looked in a recent interview? I guess it wasn’t just the puts he sold in BNI that had him flustered.
Hey Mr. Buffett, do you still think it’s okay to be greedy when everyone else is fearfull and vice versa?
Hey Mr. Buffett, how did your stock do when measured in gold?
Yeah, I know, fiat currencies are a lot like shrink wrap under a blow torch.
February 28th, 2009 at 7:42 pm
Buffett is not well positioned for a greater depression. Sure, he’s better off than everyone here so that should bother all of us. However, his ego is a lot bigger than most people’s so the contraction I see coming where even buying a coke is something most people will stop doing will bankrupt Berkshire Hathaway. The bricks and mortar thing won’t work this time. This guy never split the stock . That helped him on the way up. It’ll kill him on the way down. The panic is only beginning.
Maybe most of you think 30% unemployment will never happen. It will within a year. Sure, lots of people on the dole means nobody starves but that’s not what I call a first world country.
February 28th, 2009 at 7:59 pm
Dan Duncan,
I agree. Buffett has that kindly grandpa front and that’s all it is. Where there’s smoke there’s fire. I know some great people who live in manufactured homes. These homes that the media criticises so much are so well made that they can be transported to a site on a highway at 60 mph. Try that with a McMansion. They are durable, have r-18 plus insulation and a low carbon footprint. But buy and live in one and you become trailer trash. What incessant, shameless bullshit we are subjected to.
March 1st, 2009 at 9:42 pm
ROTFLMAO!!! This comment thread is almost surreal. I love it, a bunch of random commenters smarter then the richest man in the world who did it through investing in the markets. Let’s check back in 2015 what Berky’s stock price is versus an index short position initiated today and held through 2015.
As far as a few individuals who “outtraded” Buffett in 2008. Good job, and kudos, but yeah you made money being bearish in 2008. How much did you lose the previous 10 years carrying that bearish position, or do you really expect me to believe you initiated the position near the tippy-top in 2007 and did not get killed in 2004, 2005, 2006, 2007. With 2008 profits, are you back to break even?
Make no mistake, I think S&P 600 or even 400 is possible, but a rally to 1100 that rips the face off those short positions is likely as well. Way too many gloaters on the bearish side here and now. I have no strong opinion one way or another except the market will be much higher 20 years from now, but the market has a way of teaching humility to both bulls and bears. Pigs get slaughtered, and right now it seems like the bears are the pigs just like the bulls were the pigs in 2006/2007