Barron's Looks at Buffett's Buys

Barron's takes a detailed look at recent moves of Berkshire Hathaway (BRK.A) master investor Warren Buffett. Key takeaways:

• While publicly tepid on the stock markets, Buffett bought a record $19 billion in equities in 2007, more than double the $9.2 billion he picked up in 2006. Berkshire's equity portfolio is now worth $75B, up from $61.5B in 2006 and $37B in 2004.
• Largest equity holdings: 1) Coca-Cola (KO) [$11.9B]. 2) Wells Fargo & Company (WFC) [$8.5B]. 3) Proctor & Gamble (PG) [$6.8B]. 4) American Express (AXP) [$6.4B].
• Large stakes bought in 2007: Burlington Northern Santa Fe (BNI), Kraft Foods (KFT), Wells Fargo & Company (WFC) [another $3B], and Johnson & Johnson (JNJ).
• Buffett put on a $4.5B bet, by selling put options with expiration dates between 2019 and 2027, that markets will be higher then than now. The trade involves a notional $35B of S&P 500 and three foreign indexes. In the meantime, he gets to invest the cash.
• Berkshire took in $3.2B in premiums to insure certain junk bonds won't default -- apparently low-grade junk that offer a huge risk-reward premium.

Comments

[Britishsteel]

I have searched and have yet to find any indication that Warren Buffet has ever used options in his investment approach, could this be a calender spread he is doing ? And buying calls on the spy on unnamed foreign exchangees? They do not say what strike he bought and if they are equity options or e-mini S&P contracts. If so a good call because as the NY post said in Bold headlines its a bullish call. so if he wrote puts and people read that and buy up the S&P by a few hundred points in the next few weeks and those puts he sold lose half their value he could buy them back and pocket 2.5 billion in quick profit. Also if its a calender spread he stands to make the other 2.5 bilion back on the call side . and then when the markets are through popping and go back to test the lows he can do it all over again. And yet this is IF he did and does not prove to me that he is Bullish on the S&P just very savvy knowing that the announcement could cause a huge rally in the markets. BUT the RED FLAG for me is his own quote which is 'derivatives are financial weapons of mass destruction" AND options are derivatives. I do not think he is Bullish at all just taking advantage of a savvy strategy that his own name may cause to work out in his favor and by proxy prop up the market and halt the coming slide until the elections.

[libertasdon]

I read elsewhere that Buffett's sale of puts on foreign exchanges exceeds the S&P puts and reflects Buffett's belief that, in the future, foreign equities are likely to grow faster than U.S. Does Barrons' article touch on that at all?

[Alpha Omega]

where does one sell SPX puts with 2019 - 2027 expirations. Sounds more like "portfolio insurance" he is selling directly somehow. I don't believe he is unhedged either, though the summary does not mention any hedges.

[SA EditorEli Hoffmann]

According to the article the puts are unhedged. I don't believe he's looking for a quick Barron's "pop" -- that just isn't his style. Barron's surmises the puts were "custom brewed" by Buffett, and likely sold to insurers or other portfolio managers who guarantee clients no loss of principal under any circumstances -- that's why it's possible for him to sell such far-out expirations. The strike prices, according to Barron's, were "at market" at the time they were sold. As far as the proportion of S&P puts vs. puts on foreign (unnamed) exchanges, Barron's doesn't elaborate. If one assumes the four total positions are approximately equal, then clearly the foreign component outweighs the domestic.

Hope that helps.

[Global Alpha]

"likely sold to insurers or other portfolio managers who guarantee clients no loss of principal under any circumstances"... unless the counterparty defaults...which is not too far fetched