Thursday, March 5, 2009

Hey guys – you can make a much better investment than Warren Buffett

Warren purchased some GE converts a while ago.  Got what looked like a sweet deal at the time – a big yield and a nice conversion.

With where GE and GE debt is trading now you can – by buying debt and equity – produce a hybrid instrument that is (a) senior to Warren, (b) has a higher yield than Warren and (c) has better effective conversion terms than Warren.

Warren has stuffed up before.  He purchased Irish banks last year.  He purchased oil companies when the oil price was high.

But GE – wow.  Maybe his ability to analyse it is no better than any of ours.


Wille said...

I don't know too much about Buffet more than what I've read in the media over the years, but one would suspect that the scale on which he invests gives him access to more information and better due diligence than most other investors, including institutional investors.

Also, without anything whatsoever to back it up, considering the length of his career one might suspect he made his first bucks in an era when insider laws where less strict.

That being said, I think Buffetts greatness probably lies in his ability to stick to his guns, have faith in his general investment thesis and not get caught up in manias or depressive moods - his superiority probably doesn't lie in analysis, but in ability to emotionally detach himself from his investments.

Whitney said...

You mentioned last year regarding
Berkshire Credit Default Swaps

"I am quite familiar with Berkshire - about as familiar as you can get by reading stat statements and the like.

I can not blow it up. That means I know of no reason whatsoever that it could wind up insolvent in five years."

With Berkshire CDS's at all-time highs, what are your thoughts on the potential for a blowup now? Thanks.

Eric said...

You mean putting your feet up on the desk, drinking a cherry coke, and chatting with the CEO of the company for 10 minutes is not an effective method of investment analysis. Who woulda thought.

John Hempton said...

Berkshire CDS? Too hard.

But I still can't blow them up.


babar ganesh said...

re: the bershire cds, a possible scenario. say i was a buyer of the infamous long dated puts. when these puts go in the money, i now have very large counterparty exposure to berkshire. i might hedge that via CDS.

Sam Dooley said...

You could perhaps construct a better instrument - for investing a few thousand dollars.

But if you have hundreds of millions sloshing about you will never (by definition) buy at the very bottom of the market.

John Browning said...

er, how would you do that? At this point, admittedly a few up-market days since your post, the debt is yielding around 9.2%. Buffett got 10%. There is no traded price for 5-year options that I can find, but Buffett also got a bunch of them at $22.25. Even this far out of the money, over that time period I can't see them as being free. So what's the secret?

John Hempton said...

Its a few days later. The CDS used to trade at more than 15 points UP FRONT.

It is probably no longer true that you can construct the Buffett deal.


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