SageI recently did a very crude estimate of the value of Warren Buffett's puts betting that the price of the S&P would be above, relative to their price at trade entry. Conservatively, they're roughly up 3.5-fold, using Bloomberg analytics.

Phil McDonnell writes:

A similar back of the envelope estimate shows that his short puts are up by at least 1.5 fold using current volatility estimates.  Given the rise in volatility the puts are more likely up something like 4 fold.  Thus the write-off should be something like $5.5B * 1.5 = $8.5B (at a minimum).

In a Yahoo article yesterday it was reported that Buffet received $8B for the puts he sold.  So on the higher end the exposure might be $8B * 4 = $32B.  In any event the current write off clearly seems to be understated.

The Oracle espouses such virtues as clean accounting and a preference for mark to market accounting.  And yet, the companies he owns are not marked to market for the most part because they are not publicly traded.  Thus they continue to be carried on the books at a valuation determined by the Oracle.  If we use the S&P as a reference, the market value of the typical company has fallen by something like 50%.  BRK carries something like $250B in operating assets (excluding cash).  Thus it is reasonable to estimate that if his portfolio of companies was marked to market that it has declined by about $125B in current market value.  If this loss was taken today it would more than wipe out the $120B of equity that the company claims.

There are other hidden gems on the balance sheet.  For example one wonders what $4B in deferred long term asset charges are.  The $34B in Goodwill basically represents what the Oracle over paid to buy his companies.  In the current environment one wonders if any of that is left.  The $17B in deferred liabilities remains another mystery.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Michael Cohn comments:

The sale of puts was hardly free — just look at Berkshire's stock performance. However, what makes this strategy tenable for Berkshire was that he does not have to post margin, unlike 99.97 percent of counterparties on this trade.  This is the major advantage that allows him to play long term nominal drift and benefit from survivorship bias.  Had anyone else sold those puts they already would have been downgraded by rating agencies.


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