What Can We Learn from Buffett's Recent Put Sales?

The most recent Morningstar discusses the huge long-term domestic equity put sales by Berkshire Hathaway (BRK.A) (http://www.morningstar.com) and their foreign counterparts. Setting aside the merits of various option models for dissecting this position, there are often more important and effective ways to view risk-vs.-reward and to determine “fair value.” Our partner, Danny Mintz, has an MIT background and has based a career in trading technology, but his take is quite interesting in that he eschews mathematics, deploying fundamental analysis instead. This blend of fundamental analysis with a range of option strategies can powerfully enhance the returns of any investor’s portfolio.

Danny’s comments follow:

In extending Bill Bergman's piece, we are fortunate: over the years Warren Buffett has expressed himself so clearly and on so many occasions that we can with confidence delineate his thought processes. Buffett did not try to pick a bottom here or to time the market in any conventional sense. He never does. But we do know how he evaluates individual companies and buys their future earnings. For this bet, where he is buying the earnings of the S&P, it is the entire American economy that is relevant, given the predominant share that big business will always have here.

And what does Buffett foresee? Productivity gains for sure, since nowadays knowledge is never lost, only added to. Plus, there will be even more growth, fueled by continued population gains. Together, these trends make his puts guaranteed winners, because all he cares about is earnings.

To be sure, there are implicit assumptions that Buffett has always left unstated, such as treating the past 200 years as if they were 200 independent experiments. An argument could be made that all we have had is one two-hundred-year-long trial. In the preceding trial, when we kicked out the British, their investments all plunged to zero. And with contemporary overseas bets, there could possibly be upheaval. In any neo-colonized country there is always the risk that the population will seize its own resources and divert those resources for the benefit of the locals. However, these tumults occur so seldom, and Buffett's overseas bets are so diversified, that here, too, he sees himself on safe ground.

There are lessons here. If we start with reasonable axioms and proceed logically, we can find opportunities. That is one lesson. Heading in the other direction … we need to find all the reasons this was not a good trade. With this massive a position they must be there. The fact that this trade looks so good makes the search all the more important. It is the seductive trades that demand the most careful investigation. That is the other lesson we should take from here.

Comments

[Roger Knights:]

Buffett is betting that the roof won't fall in, IOW. (And there are more ways that this can happen than are listed above.) He's betting against a black swan. Risky--especially when betting billions.

He's assuming the future will be like the past, with the US on the ascent, or, if not, that inflation will save his bet for him, by lifting stock prices. (But stocks didn't go up during the US's most recent inflationary period, from 1977-82 or so.)

Feb 02 01:52 PM

[Jason Rines...:]

What Washington does in the near term would impact the maximum return horizen to seven year instead of five in my opinion on WB's investments.

I have stated early on that the next Bull market to be 2013 as the U.S. goes from Efficient Market back to Save and Invest.

Washington could make the outright wrong Keneysian decisions making that forecast to 2015 or a tad longer. Right now his bets are on U.S. government where he has direct influence, so a safe position for numerous reasons.

Voters will have a revolution at the polls expunging House of Reps in 2010 and 2012 which is what they do in our nation historically.

The last two global fiscal crisis' spurred World Wars. In the nuclear age, that is the biggest risk of all. I have a feeling if it comes to that we all will have other things on our minds besides the portfolio.

Feb 02 02:56 PM

[Lars39:]

Buffett may do very well over the next few years, but I fear that the average Joe will do poorly at best if they don't earn enough to save anything.

Feb 02 04:34 PM

[helplessobs...:]

Jason has it right. Right now 24 U.S. Trident submarines prowl the oceans each equipped with 24 model D missile each with 5 nuclear packages with 500 kilotons of TNT explosives equivalent. 500 kilotons obliterate everything within a radius of 100 miles of ground zero. Crew training is incessant, practicing the D missile launch following receipt of an authorized EAM(emergency action message).

Feb 02 04:46 PM

[bigtime99:]

What does that have to do with anything?

Feb 02 09:13 PM

[Jason Rines...:]

Perhaps Helpless Observers point is that if we have any influence and political capital to spend, we should strengthen our allies and assure the world we will pay off the debts. How quickly or in what form is another matter.


On Feb 02 09:13 PM bigtime99 wrote:

> What does that have to do with anything?

Feb 03 01:19 AM

[auto44:]

You'll know if they have to use them.


On Feb 02 09:13 PM bigtime99 wrote:

> What does that have to do with anything?

Feb 03 12:09 PM

[Old Rick:]

If we can get back to the topic at hand (vice the awesome power of a Trident), what Buffet has done with his put positions is write a VERY large super-cat insurance policy. Roger Knights mentioned the "Black Swan". The puts are really no different than writing a super-cat that would lose tens of billions NEXT YEAR if four CAT 5 hurricanes (a weather "black swan") hit the gulf coast. Not very likely. I see the hand of Ajit Jain in all these puts.

Feb 03 03:46 PM

[Thrift Maven:]

Expunge the House of Reps. and return it to the Pilfering Republican Political Machine? Our whole nation has already been destroyed.

McCain has obvious neurological degeneration. Fortunately, a few have seen the light. Even Lincoln Club members in Orange County voted
anti-Republican this past November.

Here's hoping the next "Republican Revolution" will be one that crushes
all of the remaining "aren't we wonderful" GOP crowd.





On Feb 02 02:56 PM Jason C. Rines (iThinkBig) wrote:

> What Washington does in the near term would impact the maximum return
> horizen to seven year instead of five in my opinion on WB's investments.
>
>
> I have stated early on that the next Bull market to be 2013 as the
> U.S. goes from Efficient Market back to Save and Invest.
>
> Washington could make the outright wrong Keneysian decisions making
> that forecast to 2015 or a tad longer. Right now his bets are on
> U.S. government where he has direct influence, so a safe position
> for numerous reasons.
>
> Voters will have a revolution at the polls expunging House of Reps
> in 2010 and 2012 which is what they do in our nation historically.
>
>
> The last two global fiscal crisis' spurred World Wars. In the nuclear
> age, that is the biggest risk of all. I have a feeling if it comes
> to that we all will have other things on our minds besides the portfolio.

Feb 05 09:21 AM

[19709:]

To g.pincheot

Get real. And while you're at it, get ready for a financial disastor in the form of the pending so-called "Stimulous" package. What it will stimulate is the necessity of your children's children's children to scratch for every last dollar to repay the overwhelming debt that will be layered on top of the cripling debt we already face.

Feb 06 04:27 PM