There’s an old Russian proverb, popularised by Ronald Reagan, which comes up among due diligence types: trust, but verify.
It seems appropriate to keep it in mind when thinking about Berkshire Hathaway, which is a sprawling insurance company and conglomerate indulged by the market largely on the understanding that its charismatic, cunning and greedy-in-a-good-way leader will do the right thing.
Hence our interest in a series of very large derivative contracts written by Warren Buffett between 2004 and 2008, which reveal a willingness to at least work creatively within the confines of fair accounting disclosure. Read more
In our exploration so far of the very large put option contracts sold by Berkshire Hathaway, we have looked at the reasons to sell them (cheap float), the potential liabilities created and the mystery of Warren Buffett’s financial disclosure. Given what we thought we knew about the derivatives, it is strange that the accounting liability was not higher in the depths of the financial crisis.
On the way we have explored option pricing and the so-called greeks, as well as the revelation that Mr Buffet appears to have sold Lehman Brothers a rainbow, helped along by a series of smart contributions in the comments.
Indeed, those comments have inspired Professor Pablo Triana, Professor at ESADE business School, to return with another piece looking at the strange role of Berkshire’s own credit quality when it comes to valuing the derivatives, which may be the missing link in this valuation puzzle. Read more
The Sage of Omaha is folksy, down to earth and on the whole entirely open about his philosophy and his approach. But he has also managed a trick almost unheard of in the modern corporate era: he discusses the business he has run for half a century entirely on his own terms.
If you are a investor in Berkshire Hathaway you can read the annual letter to shareholders, you can trek to Omaha to try to ask a question at the annual meeting, and that is it. When Berkshire publishes quarterly results it does so on Friday evenings without commentary beyond the dry notes to the financial statements. Just the numbers and in the name of fairness, the Sage either speaks to all shareholders, or none.
But that does leave some mysteries and Pablo Triana, a Professor at ESADE business School, has followed up his look at how Berkshire’s very large legacy derivatives positions contribute cheap financing, with an examination of what can be inferred about the derivatives contracts themselves. Read more
Actual new information about the great man and his methods is rare indeed. Warren Buffett is the investment equivalent of Churchill, endlessly dissected but forever in the context of a history he wrote himself — the annual letters to the shareholders of Berkshire Hathaway.
However Pablo Triana, Professor at ESADE business School, has shed some new light on the way the Sage has made money when it comes to his large but non mass-destructive portfolio of derivatives. Read more