Muzie

Value Investors: Stay Strong, and Follow Warren Buffett

"BRK now has a potential 37 billion dollar bomb sitting on its balance sheet IF the market doesn't recover in ten years...37 billion?...ten years?...."

Duh.

1) "37 Billion" is if the entire stock market goes to zero. You're being facetious here. If you think that's going to happen, then maybe you should just move on and not follow the stock market. It won't exist.
2) The puts are not in ten years. SEC documents say fifteen to twenty years.
3) BRK has cashed in 5B$ of premiums from the puts. The loss must exceed that amount before being a true loss.
4) Calculate the value of this "potential" 30B$ loss twenty years from now when accounting for inflation. Calculate that the 5B$ premium that is now is now in Buffet's hands can be put into Treasuries or CDs or invested and yield a non-negative return, mitigating any "loss". Finally establish how significant this 30B$ loss would be in a Berkshire's cash flow twenty years in the future.

"how does one assess the "value" of that?..."

There are ways and I've shown you some. That questions suggests to me it is you, not Buffet, who is out of his element here.

Buffett Serving Free Lunch?

"***I*** don't know anything? I? "

Hmm, no, apparently, you don't. As it's been stated a million times before, the puts are non-exercisable before expiration. Please look up "non-exercisable" in a dictionary. Buffet got the premiums, and he doesn't pay up until the options expire (15 years from now).

Looks like it needs to be broken down in little bitesize pieces. for you. The flow of cash:

- Buffet engages in contracts with counterparty.
- Buffet receives premiums = cash flows to BRK.
- Market tanks. Contracts are quoted at a higher value on open market. Counterparty offers to sell contracts at higher ask. Cash flows to counterparty.
- Other counterparties engage in trade, exchanging cash. BRK does not trade its own contract.

Get it?

Your spurious argument about "the market may not be higher twenty years from now" is irrelevant. The market is down now, not twenty years. When the market is still at S&P 1200 twenty years you can come back here and strut your stuff - but it has NOTHING to do with the current decline.

Did you really expect Buffet to engage in these contracts at a twenty-year low and they would NEVER get in the money for twenty years??? You must be some kind of magician - whenever I write options, most of them do end up being in-the-money at least momentarily, ESPECIALLY long-dated ones.

Anyone who studies the markets expects the market will crash at some point over a twenty year period - always has, always will. And in fact crashing early on when the puts have just been written is actally the least detrimental to the reported losses, because the delta on them is low as the time value is quite high.

Berkshire Hathaway's Peculiar Volatility Numbers

Also, if Berkshire per chance goes back up another 13%, was your friend "right" or "wrong"? Of course he made money and perhaps that is all that matters - but could anyone argue that any of this was really logical if the dip lasts just a few days?

Berkshire Hathaway's Peculiar Volatility Numbers

"It's worth noting, however, that long-term volatility at 38% implies a random walk in the index of near 2.5% every trading day for the next 20 years. If and when that number comes down, Berkshire's noncash losses today will simply be cancelled out by noncash profits tomorrow.
"

And this is where I'm lost as to why this affectes any of the company's valuation at this point. We're talking imaginary dollars here no? Even if these are marked to market, shouldn't these outflow be discounted twnety years in the future, making them rather muted?

Buffett's Gamble: $40 Billion Bet on Volatility

dlaw: They expire TWENTY FREAKIN' YEARS FROM NOW.

There's no "bath" taken because he's not going to trade in or out of them. Your "bath" is simply he could have written off those same puts for more money now then before. That's like saying he's taking a "bath" because he could have bought a rising stock for the lowest possible price but instead bought it 10$ more while turning down a profit.

You wake up!