Buffett started buying Berkshire – I sold some puts

I sold a couple of Berkshire Hathaway puts (strike 65, Jan 2013). I got in average 700 US$ for each. I think that a price of 58 (65-7) for class b stocks is quite below the point where Buffett would start buying his own stock, actually he has already started buying at much higher levels, you can see that in his interview today (part of a transcript is here below). He mentioned he was doing the paper work just now, so I guess he bought very recently and he could not have bought much cheaper than today’s price because since the buyback was in place and announced the stock jumped to current levels.

I see this as a very low risk transaction, I would really not mind having to buy at much lower prices if the put is assigned, since I was already adding mor of its stocks @66-67. Its my bigger position and would gladly triple it at the right price. This is probably the only company I feel comfortable by selling puts, it’s the one I know the more about, it has the right price plus an “insurance” from Buffett that he will buy if the stock is below its book value, even if he does not buy, just the expectation he would do it could keep the price high.

Note that I do not think, like many in the media say, that this is because he cannot find other opportunities: not so long ago he spent 9 billions on Lubrizol; he just announced a 400 million insurance deal yesterday; he made a 5 billion deal with Bank of America a few weeks ago; and now in the third quarter he bought 4 Billions in common stocks increasing the size of his common stocks portfolio by 8%! He has a lot of opportunities! Announcing he would buy his own shares if the price is right is just another opportunity more, at the right moment. It is, he said, one of the few times that the price is so attractive and since the markets are so volatile the timing of the announcement seems perfect.

If he had announced this in normal times the stock would have skyrocketed and it actually did the last time he announced a buy back, now, with the markets as they are, he might have a chance to make his announcement come true, and I also hope that the market stays like this, or worse, so that I can buy more too !

Cheers!
jrv

Transcript:

ANDREW: I want to get to you in a second and this anniversary, but I also want to get to buybacks, which are in the news this week. You just announced it. Why do it now? I think there’s a big question, Buffett watchers who’ve seen you over many years, you have not always liked buybacks. So what is it about what’s going on right now?

WARREN BUFFETT, Berkshire Hathaway CEO: Price to value. I mean, the only — the only time to do buybacks, in my view, is when you think your stock is selling well below its intrinsic business value. And we talk— we’ve talked about that in many annual reports over the years, and we haven’t had very many opportunities to do it. Now we think that…

ANDREW: OK. So you’ve instituted the program, but the big question that viewers want to know is, have you actually started buying yet?

BUFFETT: We actually have.

ANDREW: You have started buying yet.

BUFFETT: Yeah, yeah.

ANDREW: OK. And how much can we expect for you to buy? I know you said that you wanted to keep a $20 billion kitty at all times. You have about $40 billion on hand right now.

BUFFETT: Yeah. Well, we don’t have quite that much, but the cheaper it is, the more aggressive, generally, we will be in terms of buying. It’s just like buying any other stock.

ANDREW: And how much have you bought so far?

BUFFETT: We only got the paperwork done yesterday.

ANDREW: OK. And what does this say, and then I want to get to Cathy, what does this say more in a larger picture about your ability to find elephants? You always talk about your trigger finger.

BUFFETT: That’s what I’m looking for.

ANDREW: Well, I know that, but in terms of moving money into your own stock, does it mean that you’re not finding the same kind of opportunities right now, given the markets?

BUFFETT: We find opportunities periodically. I mean, we did the BofA deal, we did Lubrizol, we put 9, almost $9 billion in Lubrizol. We just announced yesterday a $400 million acquisition for an insurance company. Just yesterday. We’ve bought, in the last quarter, the third— in the current quarter, we bought net 4 billion of common equities, which was similar to the total amount we bought in the first half. The cheaper stocks get, the better I like to buy them, whether it’s our stock or somebody else’s.

ANDREW: So there’s still— there’s still— we should still see you make a big deal.

BUFFETT: You…

ANDREW: And this is not…

BUFFETT: I sure hope so.

========= Weekly transactions ==========

SLD 1 BRK B JAN 18 ’13 65 Put Option 7.45 USD AMEX SEP 30 15:27:50 1.04
SLD 1 BRK B JAN 18 ’13 65 Put Option 6.45 USD NASDAQOM SEP 27 13:19:27 0.83

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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2 Responses to Buffett started buying Berkshire – I sold some puts

  1. I hope this isn’t a large position. There’s always downside, especially with mega-cat insurers…

    Buffett’s effectively put a floor on the price of the stock, until they possibly run into short-term problems. There’s always the ‘salad oil crisis’ type risk, even if Buffett is at the helm of among the largest corp’s in the world.

    I do think the trade will go smoothly & worth the risk/return, even if it does have some downside. Just don’t get too cute trying this one. You never know.

  2. jrv says:

    From what I remember the salad oil scandal was not related to cat insurance but a fraud done by one person and who affected a financial institution, America Express. It actually allowed Buffett to make billions, one if his best home runs in his life allowing him to sell Amex shares at a multiple of his cost.

    Investing or not, action or inaction, whatever you decide is risky. There’s possible downside everywhere, even on cash, dollars or on any stock or bond directly or not affected by a sovereign/banking collapse, even on emerging markets, nuclear war, retailers, health, transport, mega inflation/deflation…

    What matters are the probabilities of events, and their associated risk/rewards, and trying to put yourself in a situation where in any bad scenario you will minimize big losses. Actually I consider one of my biggest risks that of not being assigned (that’s why I also bought shares). So I personally hope that there are more troubles in order to be assigned and get for 65-7=58 the brk b shares that are now trading for 73, if not I will just have to be happy with the return on the stocks I have and settle down with no additional assignment, just an annual 13% return with the puts. I think it is worth the risk for a cat insurance operation managed by Ajit Jain and that has consistently, even during bad times like now or with Katrina, been the top mega cat insurer and whose insurance business is around a 4th of Berkshire’s profits and not its majority source of income. Several bad mega cats already happened it would be of course possible that more happen but it’s all about the risk reward and the probability of more cats like the Jap quake happening again and “soon”.

    Another thing I like is that the stocks floor price is at least partially insured, since there is practically an unlimited amount Buffett would/can/is expected to buy under book value. Besides the huge amount of cash available he makes billions of cash flows every year that can fuel more buy backs. I’m sure he will be opportunistic (as always) and consider doing that in case of a catastrophee. He would be buying while other dump his shares (like he did when he bought Berkshire Hathaway the textile company from his shareholders even though they were warned he was buying cheap). Certainly far better for me to buy a great company at a fair price than a mediocre one very cheap.

    That said since nobody can see the future you should always have cash on the side and avoid debt or margin.

    Cheers!
    jrv

    PD: Do you have investing books on electronic format (computer file), I have some but would like some more I have not yet found so maybe we could trade? Here you can find a link to the list of books: http://investing.kuchita.com/2011/04/20/my-favorite-investing-books/.

    Given the current situation, what is your favorite company to buy now ?

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