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Tannor Pilatzke
Tannor Pilatzke
Articles (76)  | Author's Website |

Deadly Derivatives: Warren Buffett Uses the Ones He Understands

December 23, 2013 | About:

About the author:

Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

Visit Tannor Pilatzke's Website


Rating: 3.1/5 (8 votes)

Comments

workhorse_investor
Workhorse_investor - 2 years ago

I've been following your articles and been impressed. Keep up the good work.

One big factor I think is also important to consider when looking at WB's put sales: he sells puts on composite indices. Think about how this reduces risk: instead of being exposed to an individual company's stock going to zero (ie. Lehman Bros), he's putting his bet on 500 of the largest U.S. companies (with the S&P, and as you note he's also in FTSE 100, Euro Stoxx 50, Nikkei 225). 

The even bigger deal is that the components of these indices are regularly modified and updated. That means that he's not even betting on the 500 largest U.S. companies that exist today, but the 500 largest companies decades from now--many of which haven't even been born yet. Even if AAPL, PG, GOOG, XOM, etc are not around in 20 years, some other companies will be and so will the S&P500. He's betting that American/Euro/Japanese/British capitalism will exist far in the future (in one form or another). 

And you can be sure that if the S&P went to zero, we'd all be in trouble along with BRK (which makes up a good chunk of the S&P itself)

Tannor
Tannor - 2 years ago

Thanks for the very kind comments and reading my articles Workhorse.

I completely agree with what you have brought up and it was a no brainer bet for WB, the problem (for us or other investors) being it was an exclusive deal to only him, a counter party had to accept the other side (limited demand) and was backed by a billion dollar business (Berkshire).

I have no clue how composite changes effect option values or the stipulations of the contracts he owns. I would assume that they would't change (like you pointed out a HUGE advantage). I would also say you are completely correct with the rest of your analysis of WBs thinking.

Cheers.

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