It’s getting toward that time when Warren Buffett holds his famous annual shareholder meeting in Omaha. So expect the media to turn a deep shade of “steak” over the next few days.
Having been in the past, we can say it’s a blast and if you ever have the chance to go, then you should.
With Berkshire shares well off their highs and the ratings agencies all having taken it down from AAA, Buffett and his sidekick Charlie Munger might actually face some hostile questions, rather than the philosophical/religious/personal/amusing ones they often get.
Among the concerns at Berkshrie: The status of its derivative bets, including the index puts it sold on the S&P 500 near the top. Whoops!
But though you’d think that selling these puts would prove a disaster given what the market is done, it still doesn’t look like this will wreck Berkshire:
Bloomberg: To lose the full $37.1 billion on the equity puts, the indexes would have to fall to zero — an unlikely event. Berkshire received $4.9 billion in premiums, which together with what the company earns on it, may offset any eventual payments.
Citigroup Inc. analyst Joshua Shanker in a March 16 report examined several scenarios to gauge the likelihood of Buffett’s losing money on the puts. Using the S&P 500 as a proxy for all the indexes and assuming a 5 per cent annualized return on the premium, the market would have to suffer a cumulative decline of at least 32 per cent across the 15- to 20-year life of the contracts for the seller to lose money. In the U.S. market back to 1800, the only way to do that would be to start the bet just prior to the 1929 crash.
Some economists compare today with the Great Depression, and some of the puts may have been written near the U.S. market’s all-time high in late 2007, according to information Buffett has disclosed. The S&P 500 in March was down 57 per cent from its peak.
With that in mind, Shanker looked at scenarios that begin with a 50 per cent drop in the S&P 500. From that nadir, if the index rose 6 per cent annualized over 14 years, Buffett still would not owe any money when the puts expire — even without consideration of the $4.9 billion in premiums.
Disclosure: The author owns a Berkshire b-share.