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Sunday, November 27, 2022

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Warren Buffett’s Secret to Making 100% a Year

I love the Berkshire Hathaway annual report!  

Especially Warren Buffett’s letter to shareholders.  The report gives us a great view of the overall economy from a man who has his finger in every pot and his letter to investors gives us a very good insight as to how things are going in the various sectors his operations cover.  Most importantly, what I have learned in my own 40 years or reading Mr. Buffett’s reports (my Grandfather was a shareholder) is what should shape any long-term investing strategy:  Patience and performance.  

I often preach to members the joys of letting gains compound and our $25,000-$100,000 Virtual Portfolio, which is currently at $27,531 (up 10%) after 4 weeks, is an exercise in how to quickly compound small gains over the course of a year.  Primarily, we try to follow Warren Buffett’s Number One Rule of Investing, which is: Don’t Lose Money.  Buffett’s Rule #2 is: See Rule #1 and like us, it’s not that nothing Warren Buffett ever buys loses money – it’s just that he doesn’t ever buy things he isn’t willing to stick with UNTIL they make money.  Sure we take a few losses along the road but, by being selective in our entries, we don’t discard stocks that we carefully selected just because the market temporarily disagrees with our valuations.  

In our $25,000 Virtual Portfolio, it’s only been a month so we’ve only closed our winners so far and they were SPWRA with a 100% gain (these are option trades), INTC with a 40% gain, NFLX with a 42% gain, EDZ with a 75% gain, XLF with a 15% gain, VIX with a 50% gain, USO with a 53% gain and XLE with a 5% gain.  In 19 trading day we have made 28 virtual portfolio moves (counting each leg) and, as I said, netted a 10% return to date.  Interestingly, we’ve been playing it very cautious as we still have over $18,000 of virtual cash on the sidelines, hoping for a sign to get a little more aggressive next week.  

How, you may wonder, are we going to get to $100,000 by December with just $27,531 in February?  THAT is the lesson Warren Buffett has to give us and that lesson is COMPOUNDING RETURNS!  Since 1965, Berkshire Hathaway has returned an overall gain of 490,409% to it’s shareholders.  $10,000 handed to Mr. Buffett in 1965 is worth $49M today – that’s enough to keep you ahead of inflation!  Figure in 1965 a car was $1,500 and house was $20,000 so maybe $49M is worth an inflation-adjusted $4.5M.  That’s still a very nice return on your investment, right?  

Did Warren Buffett make this money swinging for the fences?  Not at all.  IN 45 years, Berkshire only returned more than 20% half the time (22).  Like we do, Warren Buffet aims to make 20% a year – anything above that is just gravy.   By not swinging for the fences, Buffett accomplishes something very few investors do – he does not strike out.  In those same 45 years, Berkshire has only had 2 losses.  One of those years was 2008 and the other was 2001 – both very tough years for the markets.  

See what 20% a year can do for you?  The hardest thing I try to do with new members is get them to let go of greed.  Greed kills.  Greed is not good – despite what you may have heard.  Sure we have fun with big, quick gains but the bulk of a good virtual portfolio is based on well-hedged, long-term positions that make our (and Mr. Buffett’s) goal of a nice, steady, 20% annual return (see our Educational series on "Smart Virtual Portfolio Management".  It’s very difficult, of course, because a person with $10,000 to invest, is not very happy with making $2,000 their first year and it’s very hard to see that that $2,000 is the first of 45 steps to $49,000,000.  

Fortunately, last year, we were able to take advantage of the crazy market run and our $10,000 virtual portfolio hit a virtual $36,000 at the year’s end.  We had, in fact, done so well that we stopped playing in the middle of the year with $25,000 as we made the money so fast it was no longer palatable to risk it but, by popular demand, we went for a double into the holidays but came up short at $36,000.  Still, it was good enough to give us an excuse to go for the gold this year and thus, our $25,000-$100,000 Virtual Portfolio was born with the goal of doing each month what Berkshire manages to do each year and compound a 15% monthly average return into a 300% gain for the year (try it on the calculator – it’s fun AND educational).  

I say again and again and again how important it is to take those 20% profits off the table.  If you ALWAYS protect a 20% gain and you ALWAYS stop at a 20% loss then you need to be 50/50 in your picks to break even.  If you balance you virtual portfolio bullish and bearish then the chance of that happening is strong.  Now, if just one out of 100 trades you make gives you a double and 4 give you 60% gains and 8 give you 40% gains and then you have 37 20% winners and 50 20% losers but your 1 100% winner wipes out 5 losers and your 2 60% winners wipe out 6 losers and your 8 40% winners wipe out 16 losers leaving you with just 15 20% losers against those 37 20% winners.  

If you allocated $1,000 to each position, that would be a profit of $4,400 in 100 trades.  As you can see – that’s the strategy we’re pursuing with our $25,000 virtual portfolio – make a little bit of money as often as possible.  As long as we make sure we keep our losses in line, our winners will take care of the rest!  Warren Buffett always says his single biggest investing mistake was his first.  He acquired Berkshire Hathaway as a struggling shirt-manufacturing company in 1965 thinking he could turn it around.  The textile business was being outsourced at the time and there was no saving it.  Rather than go down with the ship, Buffett completely remade the company into what it is today.  There is a book about this called "The Buffett Way" that’s a very good read. 

Meanwhile, according to Buffet’s 2010 report: "The per-share book value of both our Class A and Class B stock increased by 13% in 2010. Over the last 46 years (that is, since present management took over), book value has grown from $19 to $95,453, a rate of 20.2% compounded annually." The company spent $22Bn of it’s sidelined cash to acquire Burlington Northern Santa Fe and it’s already increasing Berkshire’s normal earning power by over 30% after-tax.  This is why we hold a lot of sideline cash in an uncertain market – we wait for a REALLY good opportunity to present itself.  

Buffett sees 2011 as a year free of a mega-catastrophe in his insurance segment and "a general business climate somewhat better than that of 2010 but weaker than that of 2005 or 2006."  The company plans on spending 33% more on property and equipment this year ($8Bn total) and ALL of it in the United States – where Mr. Buffett still sees good value but, like us, takes a cautious approach, saying:  "Money will always flow toward opportunity, and there is an abundance of that in America.  Commentators today often talk of “great uncertainty.” But think back, for example, to December 6,  1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain."  However, Buffet goes on to say:  

Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.  We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.

That’s the view of one of America’s wealthiest men, a man who built his fortune SLOWLY by acquiring stocks in good companies and holding them a long, long time!  Berkshire currently has $158Bn of stocks, bonds and cash equivalents as well as $66Bn of "insurance float," which are not counted as an asset but are reserves they ultimately get to keep as long as the premiums the receive net out to equal insurance losses and expenses they pay out.  

Also not counted is Buffett’s $5Bn derivative bet that the S&P will not close below 700 on 8 rolling years beginning in 2018 – a wager (a short put!) that will pay out approximately $35Bn if correct.  It may be the gift that keeps on giving for Berkshire, even after Buffett is gone.  There are also Billions of Goldman Sachs warrants – another bet Buffett was able to make by keeping his cash sidelined until there was a crisis where everything went on sale.  

We like BRK.B (the optionable securities) at $84.87 a share.  You can buy 100 shares for $8,487 and sell 1 2013 $80 call for $14 ($1,400) and 1 2013 $70 put for $5.40 ($540) and that is a net cost of $6,547 or $65.47 a share, which is a 22.55% discount off the current price.  What’s the catch?  Well if BRK.B finishes lower than $70 in Jan 2013, you will be forced to buy another 100 shares for $70, no matter what price the stock is.  That would put you in 200 shares at an average cost of $67.74 or 20.1% below the current price.

Notice on this trade you make $14.53 (22.2%) on your $65.47 investment if BRK.B just holds $80 through Jan 2013.  Of course we have strategies to roll and enhance the returns as the year rolls on but the key is to establish low entry points on long-term positions.  While you may think making 11% a year is not sexy – don’t forget you make that 11% EVEN IF the stock falls 5% and you don’t lose a penny until the stock drops 20%.  It’s only appropriate to buy Buffett’s own stock following Buffett’s own Rule #1:  Don’t lose money!  

Buying stocks at a 20% discount is the cornerstone to our long-term investing strategies which we refer to as a "buy/write" play and you can find the details in my article: "How to Buy a Stock for a 15-20% Discount."  Selling index puts is another strategy Warren and I share in common – we used a short put on the S&P to offset the purchase of an aggressive SSO trade (ultra bullish on the S&P) in December 11th’s "Breakout Defense – 5,000% in 5 Trades or Less."  In that trade, we were able to sell the SPX Jan 2011 $1,185 puts for $10 to fund the purchase of the SSO 2012 $30/42 bull call spread at $10.40 for a .40 cash entry on the $12 spread.  The S&P was trading at 1,225 at the time and we did not think it was likely they would fall 40 points in 5 weeks.  Obviously, the short puts expired worthless and left us with the spread at net .40 and no short margins!  SSO has now run up to $52.95 and that spread went over $10 for a 2,500% gain and, of course, we moved on.  

A similar tactic can be used to get more aggressive with Berkshire’s stock by selling the Jan $80 puts for $5 to partially fund the purchase of the Jan $65/80 bull call spread at $11.60.  That is net $6.60 on a $15 spread that is currently $14.87 in the money.  At $85, the gain will be $8.40 or 127% in 10 months but this very much depends on your margin requirement, which should be about $17 (20% of the strike), which drops your return on cash margin ($23.60) to a still very nice 36% for the year.  If you REALLY want to own BRK.B at $85.40, then the margin should not be an issue and, of course, the advantage is that your break-even is way down at $75.70 (10.8% off) and you make your 35% if Berkshire gains just 13 cents, rather than buying the stock at $84.87 and hoping it breaks $100.  

This is a very Buffett way to invest.  We have a conservative play that gets our foot in the door with a 20% discount and an 11% annual return and we have an aggressive play that pays us 36% in one year if the stock outperforms.  Since the "penalty" for failing to hold $75.70 on the aggressive play is owning 100 shares at that price – we can combine 1 aggressive hedge with 2 of the long-term hedges and our very worst case would be owning 500 shares of BRK.B at an average of $69.33 each or 18.3% off the current price while a move up in Berkshire nets a bonus $840 (6.5%) against the $13,094 invested in the longer trade.

In the Annual report, Buffett tells the story of how they acquired Geico, which began with his personal investment of $9,800 in 1951 but it wasn’t until the mid ’70’s when the stock ran into trouble and fell 95% that Berkshire jumped in, buying 1/3 of the troubled company when it’s price was the lowest it had been since his original investment 25 years earlier.  Now that’s PATIENCE!  Berkshire didn’t buy the other half of the company until 1996 making it, at 45 years, one of the slowest scaling into a full position moves I’ve ever seen…

That’s why I force my Members to watch "The Man Who Planted Trees."  Patience is the hardest thing we have to teach investors and options investors are often the least patient of all yet the wealth effect you can generate by unlocking that leverage, CONSERVATIVELY, over time is probably the least understood aspect of investing – especially in a World where your "wealth managers" get paid based on the rate of your account churn.  Of course "buy and hold is dead" – it doesn’t pay commissions and fees, does it?  

Geico is another gem in the Berkshire virtual portfolio with an arguable Goodwill value of $14.3Bn (one year of customer premiums) that is valued at just $1.4Bn as it depreciates.  Warren Buffett is not a guy that needs to shine up his books to impress investors (but he does take the time to mention their phone number and advise report readers to "check out their low rates").  Buffett is very pleased with his insurance sector and he should be – they have operated at an underwriting profit for 8 consecutive years while most insurance companies take a small loss (the goal is to increase your float – not to make money, per se).  As Buffett so eloquently explains:

I believe it likely that we will continue to underwrite profitably in most – though certainly not all – future years. If we accomplish that, our float will be better than cost-free. We will benefit just as we would if some party deposited $66 billion with us, paid us a fee for holding its money and then let us invest its funds for our own benefit.

I love the summary of the Manufacturing, Service and Retailing Operations

This group of companies sells products ranging from lollipops to jet airplanes. Some of the businesses enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25% after-tax to more than 100%. Others produce good returns in the area of 12-20%. Unfortunately, a few have very poor returns, a result of some serious mistakes I have made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business I was purchasing or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.

Buffett is please with TTI – who distributes electronic components, Forest River – an RV and Boat manufacturer, CTB – a farm equipment maker, HH Brown – shoes and NetJets – which members were just discussing on Friday as getting hot again as our top 1% members are back to pricing out fractional ownerships to avoid those annoying airport lines – another sign that our part of the economy is certainly improving.

As we have noted in our readings of the Fed’s Beige Book and other reports and now confirmed by Buffett, the Home Construction Sector continues to be a disaster with Johns Manville, MiTek, Shaw and Acme Brick all falling on hard times, down over 2/3 from 2006 profit levels, even after 9,400 combined lay-offs.  The Finance and Financial Products segment also has similar issues for the same reason.  The Oracle of Omaha does see a probably housing recovery "within a year or so" and "certainly at some point."  Man, I wish I could get paid for that kind of vagueness!  

Berkshire is not as worried about the utility business as we are and discusses MidAmerican Energy in the same section as Burlington Northern and looks forward to growth from both.  I was of the impression that a major reason Berkshire acquired BNSF was for the rail right of ways themselves, which will be crucial (and valuable) in laying the foundation for the Government’s eventual (we hope) investment into high-speed rail lines but there is no hint of it here.  The stock investment virtual portfolio of Berkshire stands as follows:  

Swiss Re redeemed Berkshire’s note early this year and Buffett expects both GE and GS to do the same – paying the company a total of $1.4Bn in premiums for the early exit.  As Buffett says: "Goldman Sachs has the right to call our preferred on 30 days notice, but has been held back by the Federal Reserve (bless it!), which unfortunately will likely give Goldman the green light before long."  Despite the BNI acquisition, the company is still sitting on $38Bn in cash with $10Bn coming back from GS and GE expected.  They also expect WFC to reinstate dividends soon and perhaps we should all consider them for a long-term investment on that basis.  

KO is mentioned as a favorite holding for pretty much the same reasons I pointed out when I interviewed CEO, Muhtar Kent in October.  An increase in KO dividends will make Warren and I very happy indeed!  Todd Combs beat me out to replace Lou Simpson as Berkshire’s investment manager and will get a salary plus a contingent payment based on his performance relative to the S&P (my favorite kind!).  

He’s "only" being given $1-3Bn of funds to start with but that’s the amount they expect him to deploy each year as they build towards the next decade’s $33Bn worth of investments.  I didn’t care about the money, I just wanted to spend a couple of years sitting at a desk discussing investment ideas with Warren – you don’t have to pay me for that gig but, as Buffett said: "Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit."     

I think one of my favorite parts of the current report is the semi-confessional section: "On Reporting and Misreporting: The Numbers That Count and Those That Don’t" in which the wizard himself pulls back the curtain on one of Wall Street’s dirtiest little secrets:

Let’s focus here on a number we omitted, but which many in the media feature above all others: net income. Important though that number may be at most companies, it is almost always meaningless at Berkshire. Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like. 

We have that flexibility because realized gains or losses on investments go into the net income figure, whereas unrealized gains (and, in most cases, losses) are excluded. For example, imagine that Berkshire had a $10 billion increase in unrealized gains in a given year and concurrently had $1 billion of realized losses. Our net income – which would count only the loss – would be reported as less than our operating income. If we had meanwhile realized gains in the previous year, headlines might proclaim that our earnings were down X% when, in reality, our business might be much improved. If we really thought net income important, we could regularly feed realized gains into it simply because we have a huge amount of unrealized gains upon which to draw.

Another place Buffett and I agree is on the mis-use of Black-Scholes calculations to determine the value of long-dated options.  As Buffet says (going back to our SPX example above): "We put our money where our mouth was by entering into our equity put contracts. By doing so, we implicitly asserted that  the Black-Scholes calculations used by our counterparties or their customers were faulty.  We continue, nevertheless, to use that formula in presenting our financial statements. Black-Scholes is the accepted standard for option valuation – almost all leading business schools teach it – and we would be accused of shoddy accounting if we deviated from it."

I closing, you don’t want to hear from me but from the guy I would work for for free.  His additional advice to shareholders is:

Part of the appeal of Black-Scholes to auditors and regulators is that it produces a precise number. Charlie and I can’t supply one of those. We believe the true liability of our contracts to be far lower than that calculated by Black-Scholes, but we can’t come up with an exact figure – anymore than we can come up with a precise value for GEICO, BNSF, or for Berkshire Hathaway itself. Our inability to pinpoint a number doesn’t bother us: We would rather be approximately right than precisely wrong.

John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They made the ones learned in graduate school last a lifetime. University finance departments often behave similarly. Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and 1980s, dismissively calling powerful facts that refuted it “anomalies.” (I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.) 

Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people. 

At Berkshire, we have taken his $1,000 solution (his Uncle’s advice to always have ready cash) a bit further and have pledged that we will hold at least $10 billion of cash, excluding that held at our regulated utility and railroad businesses. Because of that commitment, we customarily keep at least $20 billion on hand so that we can both withstand unprecedented insurance losses (our largest to date having been about $3 billion from Katrina, the insurance industry’s most expensive catastrophe) and quickly seize acquisition or investment opportunities, even during times of financial turmoil. 

The annual meeting will be held on Saturday, April 30th Carrie Kizer from our home office will be the . ringmaster, and her theme this year is Planes, Trains and Automobiles. This gives NetJets, BNSF and BYD a chance to show off.     

If you’ve never been to a Berkshire meeting – spend $85, buy a share and GO!  They call it Woodstock for Capitalists for a reason – it’s not just the meeting, it’s who you can meet in Omaha on a spring weekend while lining up at the various kiosks set up to show off Berkshire’s diversified holdings.

 

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 Hi Phil and members,
Is there a special trade commission rate available to members of this site at Think or swim?  If so, how to get it?
Thanks,

 Phil: 25kp/buffet
Thanks for the Buffett piece, always good to go back to his perspective.  I know Steve Jobs is a maestro, but I also love listening to Buffett and Gates for their benevolent perspective of what their wealth means.  
re: 25kp I’m following but can’t be in synch on every move, (possible email alert?), but more importantly I’m getting a feel for the scaling and rhythm of the trades.  I recall you wrote at one time when asked about certain "rules" to make an adjustment that eventually you just a get a "feel" for what the next move should be.  That feel is what I think I’m developing and hopefully with some more confidence I can start getting my position sizes scaled up so the 20% is on my whole portfolio and not just the bite size positions I’ve been taking as I learn.
It sometimes feels I’ve bought a lift ticket for the whole mountain but as when I switched from skiing to snowboarding the prudent thing has been to stay on the bunny hill.  Now I’ve got my helmet and wrist guards and ready to start moving up the mountain to the blue squares.
I stay out of the political discussions but sadly think you are correct and only a very nasty "re-boot"  is going to get us moving forward again.  At that time many will lament the missed opportunities the last decade provided to limit some of the pain.  
cheers

Phil,
SINA reports on Tuesday before the open.  Any good earning suggestions plays to take advantage of the high IV? Thanks.

Phil
I like to use the weekend to review old trades and look for what I might do on a move up or down. You mentioned KO in the Buffet piece. I own a but write on KO: stock at 61.75/now at 64.31, sold 2012 60 calls at 5.31/ now at 6.05, and sold 2013 50 put at 4.15/ now at 2.64. In addition it has a 2.9% . Can you walk me through the possible adjustments on this trade. I am still not sure when its time to act. I really like this trade and plan hold it for awhile and perhaps add to it.

Phil
Which trade do you like best on WFC? Buy/write: stock at 32.40, sell $30 2012 P&C for $8.20. 20% return with an 8% cushion on the stock price. Or the buy/write: stock at 32.40, sell $35 2012 P&C for $5.20. 28% return if the stock can eek out 8% between now and January. Or, lastly, a 30/35 2012 BCS selling 2012 p sold for $3.05 for .55 credit on the trade with the possibility of 2500% gain in 10 months. Your thoughts?
Of course there may be a valid reason for the recent drop in the value of WFC shares.
http://finance.yahoo.com/news/Big-banks-Foreclosure-probes-apf-2084398955.html?x=0&.v=4

Talking of canaries in the coal mine….interesting chart comparing the Airlines(a highly commodity sensitive business) versus the S&P500 index.   Note how in 2008 the airlines were up in tandem with the SP, however about 3-4 months before the market fell, the airlines began losing more than 20%, and lead all the way down.
 
Look at the last six months or so with the airlines again….they traded in tandem with the SP up until recently, and now are breaking below that 20% losses line…….
 
Just something interesing I found…..

 I’m sorry, I meant in 2007 the airlines were up in tandem with SP before breaking down ahead of the markets…..anyway, just something to ponder…

 My two cents on the whole unions, Democrats, Republicans argument is simply:  WHATEVER….y’all are fighting over an old paradigm.  The reset has already begun and there’s no way were going to stop it now, so you are better off putting your tremendous energy and intelligence to describing what you want the world to look like, TOGETHER, after the smoke clears.
 
You are high if you think any of these debts are seriously going to be repaid, and you are equally high if you think the banks are honest, legitimate businessmen out doing "God’s work".
 
In my opinion, having read about the American Revolution both domestically, and from the European points of view, one very major issue was clearly overlooked by the Europeans, notably the British.  The Colonies were not necessarily against paying taxes, in fact after the Declaration, taxes were raised to pay for Washington’s army.  No, the colonists were fighting for REPRESENTATION in the taxation, which was a major paradigm shift at the time.  So, from Britain’s point of view, "why don’t those pesky Colonists understand how much we fund them and how little we are really raising their taxes?"  made little sense to the Colonists who just got "hey guess what, you’re taxes are going up again…."  Why? "Because the King said so!"  
 
I believe that because of the time and distance between America and Europe during this period, the American leaders were able to sit down and decide what was in the best interest of the greatest number of people, in order to provide those things outlined in the preamble to the Declaration of Independence.  This insured the greatest chance for success of the experiment BECAUSE IT WAS THE MOST INCLUSIVE!!!   Their idea was to provide opportunity for everyone(albeit not perfectly, but a damn sight better than had ever been done before).
 
our neo-liberal, socialist state fueled by poorly executed Keynesian economics has created a similar situation now….the nanny state collapses under the weight of its own debt….and it is from those ashes we must rise again, united to build a better way and prevent both sides of our current problem…bloated, runaway government spending on preferred bases(ie unions, poor, corporations, etc.) and corporate oligarchies generating profit machines for nothing but personal gain(the rise of greed for greed’s sake).  
 
Arguing over Democratic or Republican ideas to fix a broken system is to miss the paradigm shift…..miss the shift and you lose…ask the British, or the Macedonians, or Romans, or Egyptians……
 
Peace……T

 Dang it….I don’t know how to embed a youtube…so sorry for the bad link….try this…
http://www.youtube.com/watch?v=Q_TXJRZ4CFc

Phil – "Todd Combs beat me out to replace Lou Simpson as Berkshire’s investment manager". 
Thank God, Mr. Buffet did not pick you. What would happen to me (us) if you weren’t around? 🙁

Buffett is an eternal optimist.  He was long-term optimistic about the U.S. in 2006 too.  The 45-year scale into the long position is a testament to just how far-sighted he is.   How many times did the market crash in that time? LOL.
That being said, the comments about 1941, 1987, and 2001 and the emphasis on maintaining a $20 billion dollar cash hoard for insurance and investment opportunities strike me as short-term caution.  


I haven’t checked the p/es of the underlying in all your options trades for an answer but would you ever do an option trade on a company with a p/e of 128 that trades several million shares @ day andhas  risen steadily for over a year to the high 70s?
APKT, which i noticed on ZH yesterday.

 Hoss – I agree with you that we are in need of a paradigm shift and that neither party has an answer to our debt problem.  I also agree that representation is a major part of the issue.  People will accept change and even difficult change if they feel like their voices are heard and they had a role to play.  You lost me on the Nanny state however.  Historically big budget deficits follow big wars.  As Paul Kennedy pointed out in "The Rise and Fall of Empires" every major Western empire in the last 500 years has collapsed from the weight of its own military.  It is the military state that is collapsing, not the nanny state.  The Koch brothers and Fox News would have us believe that teachers, firefighters, police and public employees are crushing states.  Are these people in the top wage earners and sucking us dry?  Are they making more than they should for what they offer society?  I’d say they are underpaid if anything, though there does need to be more merit in the system and cutting of any waste.  (As I posted yesterday, unions will have to compromise on pensions.  Pain does have to be shared.)
 
But any waste in union jobs pales compared to waste in the military industrial complex.  War profiteering cost us billions.  Weapons programs we don’t need costs us billions.  Eisenhower warned us of these dangers.   
 
When did the economy start falling apart?  When unions started asking for more compensation?  Or when banks took excessive risks and the housing market collapsed, taking away over a trillion dollars in paper wealth from Americans, plus more to bail out the banks.  As you can see it is hard for me to swallow the Nanny State logic.  Let’s put the real numbers down on paper and follow the money.  It is not flowing from taxpayers to unions in the quantity that it is flowing from taxpayers to the military and banks.

 O’Reilly, Limbaugh and Hannity are all union members!
http://www.alternet.org/story/150054/confirmed:_union-bashing_right-wing_media_stars_hannity,_limbaugh_and_o'reilly_are_afl-cio_union-affiliated_members?akid=6579.278711.deMqVJ&rd=1&t=18
As it turns out, all three of them belong to the American Federation Television and Radio Artists union (AFTRA), which is the AFL-CIO affiliate for television and broadcast workers.
In the same segment where O’Reilly blamed government financial woes on union benefits, he not only said he was an AFTRA member, but that his membership had benefited him in the past. "On a personal note, I’m a member of a union, AFTRA, and when I was working at ‘Inside Edition’ some years ago, the King World company tried to renege on pension benefits," said O’Reilly. "AFTRA took them to court and the case was settled. If the shop had been non-union, we might have been stiffed."

Good Morning!
 
Hoss – Republicans and Democrats.  Same pot.  Sometimes, it’s hard to understand why some board members think it always needs to be us vs. them, when all along it should be about Life, Liberty and the Pursuit of Happiness, for all…..
 
Some will never get this concept.  It’s not Republican, It’s not Democrat, It Just Is.
 
revtodd64 – I’ve enjoyed you comments.  🙂
 
Off to the beach, got some stone skipping to tend to…..

 RevTodd – I agree with you, and in pondering this further, I believe I have misused the term Nanny state.  Nanny state is too narrow in definition, when I was thinking more expansively.  I mean the constituency problem we face in our current government, ie Nanny State being the party in power delivering everything to their constituents….not just Democrats to public unions, or Republicans to corporations(read Military Industrial Complex as you noted)…or the varied lobbiests on both sides of the aisle.
 
What I see is the government has become the abyss, creating greater and greater demands on a shrinking tax base which will begin to feel disenfranchised, igniting a similar paradigm shift to what was referring in the American revolution.  I believe that paradigm shift has already begun……..
 
the attack on public unions’ collective bargaining agreements is merely the oligarchy striking to destroy their perceived opposition, when to be truly effective, and possibly gain passage, the agreements need to be on the table concomitant to cuts in corporate power(ie a return to something like Glass-Stegall – banks being banks not investment instruments).  Until we begin thinking in terms of an approach that provides the most opportunity for the greatest number of people, and can become and idea upon itself, like the American Revolution, we run the risk of one side or the other winning and creating a lesser state(ie Russian Criminal Oligarchies, Italian Mafiosi, Corporate Kleptocracy, marxist state and the risk of the rise of another totalitarian state like Stalin or Mao.)
 
The shift is real, and if we want a positive outcome, we need to start coming to some agreement about what that looks like…….good points Rev.

 Sorry Phil…..I didn’t see your post till mine went up…I will refrain from posting here…I apologize

Phil/Buffett
 Really enjoyed your article on Buffett.

JNJ
buffett increased his position in 2010 by 70%, the low in JNJ for 2010 was about 56, how about selling jan 2012 57.50 put @$3.50  or the  july  57.50 puts for 1.50, if you think the company is definitely heading up from here and you want in now, good long term company (3.5% dividend yield)

 Sorry Phil, I spend Sunday mornings getting charged up.  Thanks for the Buffet write up.  You are strengthening my resolve to stay focused on the long-term investment strategy.  I have plenty of cash on hand awaiting a government shutdown.  
 
Hoss, I appreciate your comments and look forward to more.
 
1020 – Enjoy the beach and skipping stones.  FWIW the biblical text for the day is this:

25“Therefore I tell you, do not worry about your life, what you will eat or what you will drink, or about your body, what you will wear. Is not life more than food, and the body more than clothing? 26Look at the birds of the air; they neither sow nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not of more value than they?27And can any of you by worrying add a single hour to your span of life?28And why do you worry about clothing? Consider the lilies of the field, how they grow; they neither toil nor spin, 29yet I tell you, even Solomon in all his glory was not clothed like one of these. 30But if God so clothes the grass of the field, which is alive today and tomorrow is thrown into the oven, will he not much more clothe you—you of little faith?

 Love the Buffet stuff, thank you Phil.  Rev – love the passage for the day…great stuff, many of the answers we seek may come from the spiritual side…
 
Phil, don’t overlook the end of the month trade….March 1 is Tuesday

 Phil / others – Two stocks that I would like your opinion on. I’ll present a quick thesis with each for comment. 

GS – OK, this stock has been flat for almost a year now, if not more. The earnings are stable and strong. As the trading environment gets better, and as M&A picks up I would expect them to outperform. With a good M&A environment, they good earn $19/share this/next year. Thats $190 at 10x, and about 1.4x book. Also, these guys own tons of their own stock….as they get out of the buffet deal, and with their cash, I would expect a buy-back at some point as a catalyst for the stock. What do you think about picking them up in the low 160s? Also the IV on the options is really low, so you can pick up ITM Leaps for not such bad prices. 

GOOG – Huge cash position. Great earnings. Not overvalued by any metric. If they have $100/share in cash, and do $40/share EPS next year, 700 per share price would be 15x. Android is growing quickly. IV is also down recently for whatever reason. A long term call spread? I feel that if the market has a good year, we should see GOOG back at 700+ again. 

Thanks!

Phil–great Buffett article–Tx

btw do you like SYNA–what do you think of following BW—buy stock at $30 and sell the april  29 puts  for $ .90 cts and april 31 calls for $1.00?
Tx

Hoss , Thanks for the Airline chart. Could that be posted monthly?

Pharm/25kp
The May $122 Dia puts should be $5.11 instead of $4.11 and thanks for tracking the portfolio.

Phil
I have been curious about how the options of certain stocks react when the VIX goes up and down. I have been watching MSFT specifically. The VIX went from 16 to 23 back to 19 last week. At the start of the week, the MSFT 2013 $25 puts and calls were at $7.60. I checked during the week when the volatility flew up and when it dropped back down and the 2013 combo stayed at $7.60. Why did this premium not increase as the VIX increased? Is 2013 too far out for short term volatility to have an effect on the options? I have been waiting for the VIX to go up to drive up this premium and was disappointed when it did not happen. 

 Rev
Thanks for your comments, some of the most balanced out here. I also appreciate the scripture, that passage was a great comfort at certain times when I felt my portfolio melting away (before I was a better student of Phil’s).
Spent some time in the UK recently, a few observations:
– Far more multi-cultural than the US, foreign languages spoken everywhere and almost everyone that waited on us in hotels, pubs restaurants and the usual tourist attractions was not english. Many eastern europeans. Not sure the meaning of this – maybe the devaluation of the pound encouraging travel?
– Service and food generally horrible – I found myself looking forward to food at home
– Public transportation system is outstanding in general. The best/most modern station was Westminster – the pols taking care of themselves first I suppose.
– BBC was all over the Libyan issue, devoting most of their broadcasts to that, very little news percentage to other issues by comparison.
– Everything very expensive compared with the US – exchange rate issues I am sure, but is there another reason?
Hope that helps us in some way form an investing standpoint. Cheers!

 rj-jarboe – the options of an individual stock are reflective of the IV of that individual stock. So, even though the VIX goes up or down, the options of a certain stock may react differently depending on the IV for that stock and how it is changing. Imagine a hypothetical example, where in 1 week the VIX goes from 15 to 25. Meanwhile, company A releases earnings on wednesday, and the stock price does not move. The IV of the options for stock A will decrease considerably because of the passing of the earnings event, and this could more then counterbalance the effect of the rising VIX. Also, options that are so far out (2013) may not be impacted by temporary short term rising of the VIX. Hope this helps some, and i’m sure phil can add more…

 So if Buffett says " Borrowed Money is the most common way that smart guys go broke", then why does he seem oblivious to the fact that this is exactly what our country is doing ?

Forgive me for commenting on the budget issues here, but RevTodd, your points are just off the mark.
We are talking about state budgets right now, and last I checked, there were no military or "military industrial" expenditures there.
The problem is spending, and for the states it is largely driven by exploding benefit costs to public sector (unionized) employees, and exploding Medicaid/Medicare obligations.
 
On the federal level, the problem is spending – everywhere – entitlements, military, pork, waste, tax breaks to those who don’t need it; and so on.
 
But Hoss has a point also in that neither party is currently geared to solve these problems, although, my opinion is that the Democrats are congenitally ill suited to even make a legitimate effort, they don’t even pretend to acknowledge that we have a problem.
 
The IL Quinn article is telling also:
Quinn defines "Everybody in, nobody left out" in a way that excludes the labor union allies whose money and muscle arguably got him elected Nov. 2.
It’s as if the governor is determined to keep proving, and proving, a point we made Oct. 10: Pat Quinn is relentlessly starving clout-poor social services so he can protect the jobs and benefits of his union supporters. Shame on Quinn, and on all of us in whose name he perpetrates this raw injustice.
 
http://www.chicagotribune.com/news/opinion/editorials/ct-edit-quinn-20110224,0,1484443.story
 
Same goes for Gov. Cuomo in NY, who is talking the talk, but is he really prepared to walk the walk ?
 
http://www.nypost.com/p/news/opinion/opedcolumnists/cuomo_tied_down_HNevJXMS0dcfKGGiz5ZG2O
 
What the unions and politicians have done to disinfranchise the taxpayers is stunning, but the machinations are so arcane they escape notice of most of us:
 
 
Meanwhile, a small group of Assembly Republicans (members, to be sure, of Albany’s least potent minority) has introduced a bill repealing the Taylor Law’s so-called Triborough Amendment, which dates back to 1982.
Unique to New York, the amendment keeps all provisions of a labor contract in effect even after the contract has expired.


“This mandate undermines the collective bargaining process and discourages those at the negotiating table from making givebacks or concessions, putting New York’s taxpayers at an extreme disadvantage,” the sponsors of the repeal bill note.
 
Triborough is especially valuable to teacher unions, whose members spend most of their careers receiving annual “step” increases in addition to negotiated raises in their base pay. When school districts seek concessions, unions can stonewall with the knowledge that their members will continue receiving pay hikes even after the contract expires.
 
The Triborough Amendment is also imposing an added cost on the state government. State worker contracts expire at the end of March, and Gov. Cuomo has said he will freeze pay for at least a year — yet his budget includes $140 million more in Triborough-mandated “step” increases for about 50,000 employees.
 

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/cuomo_tied_down_HNevJXMS0dcfKGGiz5ZG2O#ixzz1FDhGOPWZ

Forgive me for commenting on the budget issues here, but RevTodd, your points are just off the mark.
We are talking about state budgets right now, and last I checked, there were no military or "military industrial" expenditures there.
The problem is spending, and for the states it is largely driven by exploding benefit costs to public sector (unionized) employees, and exploding Medicaid/Medicare obligations.
 
On the federal level, the problem is spending – everywhere – entitlements, military, pork, waste, tax breaks to those who don’t need it; and so on.
 
But Hoss has a point also in that neither party is currently geared to solve these problems, although, my opinion is that the Democrats are congenitally ill suited to even make a legitimate effort, they don’t even pretend to acknowledge that we have a problem.
 
The IL Quinn article is telling also:
Quinn defines "Everybody in, nobody left out" in a way that excludes the labor union allies whose money and muscle arguably got him elected Nov. 2.
It’s as if the governor is determined to keep proving, and proving, a point we made Oct. 10: Pat Quinn is relentlessly starving clout-poor social services so he can protect the jobs and benefits of his union supporters. Shame on Quinn, and on all of us in whose name he perpetrates this raw injustice.
 
http://www.chicagotribune.com/news/opinion/editorials/ct-edit-quinn-20110224,0,1484443.story
 
Same goes for Gov. Cuomo in NY, who is talking the talk, but is he really prepared to walk the walk ?
 
http://www.nypost.com/p/news/opinion/opedcolumnists/cuomo_tied_down_HNevJXMS0dcfKGGiz5ZG2O
 
What the unions and politicians have done to disinfranchise the taxpayers is stunning, but the machinations are so arcane they escape notice of most of us:
 
 
Meanwhile, a small group of Assembly Republicans (members, to be sure, of Albany’s least potent minority) has introduced a bill repealing the Taylor Law’s so-called Triborough Amendment, which dates back to 1982.
Unique to New York, the amendment keeps all provisions of a labor contract in effect even after the contract has expired.


“This mandate undermines the collective bargaining process and discourages those at the negotiating table from making givebacks or concessions, putting New York’s taxpayers at an extreme disadvantage,” the sponsors of the repeal bill note.
 
Triborough is especially valuable to teacher unions, whose members spend most of their careers receiving annual “step” increases in addition to negotiated raises in their base pay. When school districts seek concessions, unions can stonewall with the knowledge that their members will continue receiving pay hikes even after the contract expires.
 
The Triborough Amendment is also imposing an added cost on the state government. State worker contracts expire at the end of March, and Gov. Cuomo has said he will freeze pay for at least a year — yet his budget includes $140 million more in Triborough-mandated “step” increases for about 50,000 employees.
 

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/cuomo_tied_down_HNevJXMS0dcfKGGiz5ZG2O#ixzz1FDhGOPWZ

 Pharmboy – DEPO
 
1nvestor$DEPO http://chart.ly/kpmfy8l Monthly. Forming a Shooting Star, Trend Reversal, will need conf in March.
 
If you are reading this post, can you give us your updated color on DEPO tomorrow ?

 Cap – I will make an honest attempt to read some of the articles you have posted later today.  I don’t think it is helpful to look at state and federal budgets in a vacuum.  The states are struggling because the federal government keeps forcing tough budget decisions down to their level, often with mandated spending.  Since we have not been able to come up with some kind of decent national healthcare program, states are increasingly asked to foot the bill for Medicare and Medicaid.  the Federal budget mess means that making hard decisions on national priorities is shoved to states and local governments.  
 
You and I at least agree on where some of the problems are.  Since I work with homeless people, I would be the first to tell you that there is a tremendous amount of waste in how we do healthcare.  It is absurd.  There is no "bang for the buck" in the system.  Most Western industrialized nations have figured a better way, even if imperfect.  You and I probably also agree that too many people see government as a way to enrich themselves rather than a means of solving common problems.  Where we disagree is to the value of unions and how much they are part of the problem or part of the solution.  I believe unions will need to make concessions on pensions, as they did in Atlanta, but that collective bargaining rights and the right to organize are essential to the middle class.  Don’t forget that Reagan was president of the screen actors guild before he was President of the United States.  And as I posted earlier, all the Fox News broadcasters are in a union.  It makes it hard for me to take the Republican union busting seriously, other than they are just trying to undercut the Democrats power base.
 
Sorry Phil for posting here, but I wanted to keep the response on the same page as the comment.

hanna5,
Thanks for your insight on volatility.

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