Guest post: When float is bad in Portugal but good in Omaha

Professor Pablo Triana of the ESADE Business School is a derivatives expert whose work we have featured extensively in this series on the very large put options written by Warren Buffett’s Berkshire Hathaway. In this post he contrasts the fate of bets made by a Portuguese rail operator with those of the Sage of Omaha, where the main difference is the judgement of hindsight.

What separates the greatest ever trade and the worst is, obviously, the outcome. But should the traders be viewed any differently for responding to the same motivation: money now for the risk of having to pay more back in the future? Read more

Six questions for Warren Buffett

On Saturday Warren Buffett will answer questions about his company in public, in front of an audience of 20,000(ish) people at the Omaha CenturyLink Center. It is part of the Berkshire Hathaway annual meeting.

There will be six each from analysts Jay Gelb of Barclays, Jonathan Brandt of Ruane, Cunniff & Goldfarb, and Greggory Warren of Morningstar. Shareholders in attendance can queue up at a microphone, while journalists Andrew Ross Sorkin of the New York Times, Becky Quick of CNBC and Carol Loomis of Fortune will ask the best questions sent to them by email.

As FT Alphaville won’t be there (and would be exiled to the stadium’s rafters with the FT’s Stephen Foley and the rest of the world’s press anyway), here are the questions we suggest that someone put to the great Sage — with some explanation of why they’re important. Read more

Buffett derivatives, just ignore the volatility

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

Buffett Derivatives: back in black

The Berkshire Hathaway annual report released on Saturday is full of information for Buffett watchers, but for those fascinated by the very large put options sold by the great Sage of Omaha, turn straight to page 47.

As of the end of 2013, and as predicted by our good friend Pablo Triana at the Esade Business School, fair value for the put liabilities of $4.7bn is now less than the $4.9bn of premium Berkshire received for writing the options.

Broadly, what that means is Warren could offer to buy back the puts at a small profit. We think it’s unlikely, but it illustrates the underlying reason for writing them in the first place – the use of billions of dollars of capital for several years. Read more

Buffett derivatives, feel the (credit) quality

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 Buffett derivative mystery gets more exotic

In the comments on our last piece on Berkshire Hathaway’s very large derivative contracts we and Professor Pablo Triana learned that Warren Buffett treats the put options he sold between 2004 and 2008 as hard-to-value Level 3 liabilities that must be marked-to-model (or myth). See page 84 in the 2009 annual report.

That helps to explain why the quarterly mark-to-market losses Berkshire reported on the contracts were not larger, given big moves in currencies and equity indices in 2008 and 2009. But in resolving one mystery it created another, because valuing large put options is typically straightforward, even if like Mr Buffett you dislike the theoretical basis for doing so, and Berkshire’s commentary and disclosure has always indicated that the contracts are of the plain vanilla variety.

This has prompted the good professor to come back with a new question: so what kind of puts did Warren Buffett sell, exactly? And in trying to answer it he has found that to Lehman Brothers at least, Berkshire appears to have sold some exotic derivatives indeed (which would raise another question, were they properly disclosed?). Read more

Dig into the mysterious Buffett derivatives

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

The Buffett difference, derivatives edition

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