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Just another guy attempting to fight monetary policy with my savings
  • Taking A Nibble At "Baby Berkshire" Markel 2 comments
    Jun 27, 2014 3:24 PM | about stocks: MKL, BRK.A, BRK.B

    I deeply respect Warren Buffett's approach to investing and Berkshire Hathaway (NYSE:BRK.B) is a top ten core holding in my portfolio. I'm still building my position and expect over time to have Berkshire become my largest holding. While Buffett and Charlie Munger have clearly done an amazing job -- there is a reason I'm buying into their business -- I do worry that the current size of Berkshire means future returns will be muted. I've been studying options to offset this risk and took my first small step towards real commitment today.

    I've been studying Markel Corporation (NYSE:MKL) for a few years; in the last six months more deeply. In short, they are of the same mindset and approach as Berkshire yet vastly smaller and younger. Based on the stock's price chart I clearly should have done less studying and more buying in the last three months. Oh well, that 20/20 hindsight problem...

    One of the very best Seeking Alpha articles I've read about any stock was written by contributor John Huber. Rather than try and tell you about Markel and the investment thesis, I strongly urge you to go read his excellent article, "Markel: A Compounding Machine At A Cheap Price." John does an excellent job laying out the case for Markel's success and approach to business.

    While I'm not ready to outright purchase Markel at the current price, today I took a first step and wrote the $650 October 18 put. I was paid a premium of $18.50 and this will provide a return of 9.2% annualized over 113 days. If I am "put" the shares, I'll happily buy as I'm getting a 3% discount compared to outright purchase today. My break even price is $631.59.

    I look forward to being a shareholder yet wonder how long I will need to be "paid to wait."

    Disclosure: The author is long BRK.B, MKL.

    Stocks: MKL, BRK.A, BRK.B
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  • ipahophead
    , contributor
    Comments (168) | Send Message
    Author’s reply » This trade completed with me being put the shares at the strike price of $650. (MKL) did not trade below my break-even price ($631) during entire length of this put; however, it got close several times.


    MKL closed on day of expiration at $647; the day after assignment MKL opened right at $650 so this was a great trade -- 9% annualized *and* break-even on assignment.


    I'm now a MKL shareholder and will study the premiums for my writing my next MKL put.


    The big negative I see in MKL options is they are *very* thinly traded. The bid-ask spreads are wide; the few times I thought about closing out this put and just buying the stock (e.g., on on 10/16 when the stock was at $634) the premium was shaky and last trade was several hours/days old.


    Said another way, once entered, writing MKL puts seem to be a pretty firm commitment -- getting out early for good or bad reasons is really tough. I've not had this experience with BRK.B options where volume and liquidity are much higher. It could just be the two obvious problems that 1) MKL shares are 5x the price of BRK.B so contract commitment is much larger, and 2) MKL trading volume dramatically less.


    I may try to use this to my advantage by placing GTC put orders above current ask and see if the illiquidity works in my favor. Meaning that if someone really wants to buy a put, there are few of us selling.
    20 Oct 2014, 12:02 PM Reply Like
  • madrem
    , contributor
    Comments (656) | Send Message
    MKL is 10% of my portfolio. I was luck enough to get in the 440s range, when the Alterra acquisition created a sell off in the stock. What a sweet buying opportunity that was. I don't want a lot more from this company. As long as they can compound the BV at 15 % over the next 10-15 years, I will be more than happy. The returns will be enough to pay for my kids education and I hope at that time, my kids can take over the education compounding machinery and have a satisfying career along with better economic prospects.
    27 Oct 2014, 04:46 PM Reply Like
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