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Take the Free Put on Berkshire Stock.
Oracle of Omaha, Warren Buffett, is nothing if not clever. By offering to buy back his holding company’s stock, Berkshire Hathaway (BRKA), for the first time in history, he is in effect offering investors a free put. And the way he is going about this, it will not cost him a penny.
This is no idle threat. Berkshire boasts a gargantuan $77 billion in cash and equivalents on the balance sheet. Buffett prefers to keep at least $20 billion in cash at all times in case a prospective elephant comes into his sites. That still leaves $57 billion for stock buy backs in a company with a market cap of $165 billion. Buffet has said that he will pay no more than a premium of 10% over book value.
Unlike you and I, Buffett likes to buy whole companies instead of shares in listed firms. That’s how he swallowed whole the railroad, Burlington Northern, last year for $40 billion. The company is believed to have doubled in value since then, powered by a massive cash flow.
Buffett’s last try at bottom picking in 2008 worked out fairly well, when he bought $50 billion worth of blue chip stocks like Goldman Sachs (GS), General Electric (GE), and Dow Chemical (DD) for pennies on the dollar. His timing may be early from the point of view of shorter term traders like myself, but they usually turn out well.
Although many describe Berkshire Hathaway as a quasi-index fund, Buffett’s cumulative return since 1964 is 500,000%. Buying one of the world’s best quality, cash flow rich portfolios run by the world’s smartest investor at a big discount with a free put sounds like a deal to me. Many of his holdings are wholly owned and unavailable to investors any other way. Buy the shares, and you’ll get some free See’s Candies at the next shareholder meeting as well, another firm that Berkshire owns.
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"Buy the shares, and you’ll get some free See’s Candies at the next shareholder meeting."
That could prove mighty expensive candy.
As usual MHFT long on superlatives and short on facts.
WEB got 10% on his GE and GS special preferreds, 5% on recent BAC special preferreds, with the associated warrants since out of the money and preferred's facing redemption ceasing BRK/A cash flow. The warrants also expire in a coupla years.
The same Silver WEB sold went from $8.83 in 2006 to $49.82 in five years, versus BRK/A from $114,500 in 2006 to $90,000 recently, a 41.82% Silver Compound Annual Growth Rate the last five years versus -2.87 CAGR for BRK/A.
There may be no lasting BRK/A put if the stock market, down some -86% in real terms since 2000 and -33% nominally since Oct 2007 S&P 500 highs, continues down, for the simple reason that the man who described derivatives as weapons of mass financial destruction and said you can tell who isn't wearing shorts when the tide goes out, has 39 European style (exercise at expiration) naked (without collateral) put option shorts open on average for the next 10 years, with a potential risk of perhaps $39 B, a risk reward ratio approaching ten parts risk to one part reward, even if the likelihood of ruin is reduced.WEB argued the $4.2 B premium received was invested like insurance float. The reality is the naked BRK/A puts are marked to market, affecting the BRK/A bottom line. In the Q4 2008 market decline, the -77% resultant decline in BRK/A earnings changed BRK/A's credit rating from AAA to AA.
Further, what were originally European naked put options without collateral was materially changed late in 2010, when at the instigation of the counterparty, BRK/A unwound eight contracts, all of them due between 2021 and 2028, costing BRK/A $425 million out of pocket.
While the risk of a perfect market storm may be a black swan event, having seen one, we wonder if black swans flock. Even for a company with $184 B in market cap, a $39 B market risk with correlated economic market assets is material. The risk to a market economy sensitive company is increased by naked put shorts.
WEB and BRK may be canny actuaries, but likening naked puts to writing insurance and investing the premiums may be a serious stretch.
"nothing if not clever" may indeed apply...
How would I exercise the put?