Post New

Book value has done very nicely.
Up 18.7% from one year earlier. Whee!

Alas, that's about the end of the particularly good news.

First, there is the issue of book value as a fluctuating yardstick.
The elephant in the room is that the market price of Apple shares went up just under 50% in the first half of the year.
Apple's business continues to do very nicely, but I think we can all agree that the true value of a share of Apple didn't rise 50% in six months.
So the bump to book value from that rise is mostly statistical noise.
It's about $31980 per share of book value increase year-to-date after the provision for tax...more than half of the $60970 rise in book value.

Hey, we all know the stock portfolio goes up and down. No big shocker there.
Sometimes it doesn't go up but we know true value increased, so we don't worry about the dips and flat spots.
But the flip side is that we have to remember that at other times, such as now, we're pretty sure book went up more than value went up.

Moving on...
The more brow-furrowing concern for me is that the operating subs aren't doing very well lately. Though it is no doubt a combination of factors, it seems that inflation has thrown them for a loop: they aren't keeping up.

I track what I call the "steady things": rails, utilities, manufacturing/service/retail, and a cyclically-adjusted proxy for underwriting profit based on float and premiums earned.
Summing those for each quarter, and based on the trend of growth and seasonality, it's easy to estimate what a given quarter's after-tax income is likely to be given the previous four figures.
Usually the estimate is really good. Lately, not so much.
For the last five quarters, the estimates of real after-tax profits in those four together have been around 11% lower than would otherwise be expected, or $2.18bn/year.
Since my model is based on the prior 4 quarters it adapts to lower levels within a year: any one-time but lasting drop would have left the accuracy of the current quarter's estimate fine.
But it too is low by about the same mount this quarter.
If you value those items at 15 times earnings as a proxy, then the firm is worth $32.7bn less than it "should" have been if things had continued as they usually do.

Now, that could be for a number of reasons.
Certainly the earnings will stagnate or fall in recession/bear market periods, which is normal.
But we aren't really in either of those situations to any great degree, which is why it has been bothering me.
There are many one-off things that could affect it, for sure: poor comps for rail volumes, lags in regulated utility rate increases, abrupt price spikes from supply chains, staffing costs/problems, and so on.
But given the extraordinary breadth of the businesses involved, it's hard to ascribe it to anything "idiosyncratic".
If this collection of activities has above-average pricing power, it sure isn't showing up in the numbers for now.

Some observations:
Trailing four quarters net earnings, compared to trailing-four-quarters four years earlier (since before the pandemic), inflation adjusted:
Rail real net profits (total, not per share): -3.9%/year
Utilities real net profits (total, not per share): +3.2%/year
Manufacturing/service/retail real net profits (total, not per share): +1.3%/year, excluding Pilot and non-controlled entities
These are not very inspiring numbers, especially as it's likely that all of them have had fresh capital deployed into them for expansion.

What's the bottom line?

My value estimate for a share is up only inflation + 1.46% in the last year. That's with Apple valued on (smooth) earnings per share, not market price.
Over two years it's up inflation + 0.7%/year per share, and over 3.5 years (long enough to be a pre-pandemic baseline) it's up inflation + 4.9%/year.
We are in the doldrums for observable value growth. And a recession is pretty likely to be imminent, so there is no great prospect for an immediate upswing.

I commented a few times that real value growth per share had been unusually good for a while, even above the long run trend since 1998, so we were due a below-trend stretch. But I hate being right about that.
Even with the very "happy" book value per share, in real terms it is still below the long run trend which has been remarkably linear since the Gen Re purchase.

Here are a couple of pics that others might find useful.

I calculated a value metric for a share of Berkshire, then scaled that to maximize its match to the share price, so it gives an "expected price" level.
http://stonewellfunds.com/FairValueChart2023-Q2.pn...
This graph is in log units, so a straight line represents a constant growth rate.
And most importantly, every point is inflation adjusted.
The latest price is the tiny white box on the burgundy line. The pale grey background is the future.
This shows that, for this metric anyway, we're above "expected" share price given the last year of financial results and Q2 investment assets.

Here is the same thing, but with some other lines added to it.
http://www.stonewellfunds.com/BuybackChart2023-Q2....
1.20 times most recent real known book per share, the old buyback threshold
1.55 times most recent real known book per share, an old rule of thumb for true intrinsic value
My "two and a half column" value metric: investments per share, plus a multiple of after-tax earnings on things other than investments, minus 30% of float as a proxy for the drag of forever having a substantial cash allocation.
A "consensus" value estimate, which is basically a mix of the above

What is the outlook for the share price?
If the future resembles the past in terms of value growth rates--and valuation multiples post credit crunch--most of my tea leaves suggest something like inflation + 3.5% in the next year as a central guess.
That will be wrong, but the idea is that it's a 50/50 shot whether it will be high or low.
With one optimistic exception, my various model forecasts are in the range of inflation -1.8% to inflation + 5.2%.
One model takes into account that apparent value may drop in recessions, but true value doesn't...similar to the first linked graph above. It expects perhaps inflation + 4.7% in the next year.
That's starting from today's price of $352.26 per B, and CPI at 305.11.

Obviously I am human, so I do make mistakes. No guarantees this is all correct, but I present it for your reading enjoyment.
I hope to be pleasantly surprised by the value growth in the next year.

Jim

If I could ask Mr Buffett one question about the recent financial results it would be:

The insurance business is performing strongly, which is a huge driver of value and great to see. However, we are seeing considerable weakness across quite a number of operating businesses. Could you comment on what is driving this at the various different businesses? (Are customers happy? Are we maintaining market share? Are we seeing technology disruption? Are managers loosing focus? How has inflation changed the economics? Is the consumer really starting to struggle? Are the drivers unique to Berkshire or are competitors also struggling?)

All businesses have a life cycle and Berkshire famously is a home for that entire life cycle. We of course hope that the businesses survive and grow for multiple decades and that has been the experience but we must also accept that as time passes, some will begin to fade. You have said in the past, or a least Charlie has said in the past, that as Berkshire generates capital and deploys that capital into new businesses and investments some of the older allocations begin to fade away and become less significant. Much like an index Berkshire is continually being restocked with new cash generators.

Given that it is getting increasingly difficult to allocate larger amounts of capital into high return situations. Should we be concerned that some of our cash cows are getting old and are not being replaced? The cash pile has become enormous. But we are getting a return on it but nothing too exciting after inflation. We have bought a material amount of Berkshire stock back in recent years at very attractive prices but that door is shut for now. We have done an incredible allocation with Apple but the fruits of that move have been picked perhaps. The oil investments recently are huge and we will see how that plays out. Probably very well.

Something always shows up for Berkshire and it will again but it's an interesting period.

Looks like the B's will be up between $5-$6 this morning.

Mr. Market is funny.

Thanks for the excellent analysis Jim.

Given the continuing evidence of significantly reduced value growth, suggesting an inability to raise prices to keep up with inflation and that the pricing power we all assumed to be present in Berkshire's core businesses may not be there, do you anticipate significantly changing (reducing) your portfolio's Berkshire allocation as a result?

Or do you intend to wait and continue monitoring performance over the next year to gauge if this is a temporary blip (or perhaps a lag effect at play with the price increases)?

I also wonder if we'd expect value growth to pick up again if inflation continues to subside. It seems non-intuitive to me, but could there be a factor at play with the business that significantly boosts Berkshire's earnings ability in low inflation environments but decimates it in moderate to high inflation environment like that which we've been in?

I would have thought that a lack of pricing power (if that's the issue at play here) would be pretty damning for future value growth prospects even in a low inflation environment.

Or do you intend to wait and continue monitoring performance over the next year to gauge if this is a temporary blip (or perhaps a lag effect at play with the price increases)?

I don't think of it as bad news per se, more like a mere absence of good news.
When it comes to the trajectory of observable value, flat spots do happen, as shown on the graph.
I don't worry about those too much. I presume earnings growth will resume, at some reasonable rate.
Maybe the future trend rate of value increase will be a pinch slower than before, but that's OK, it has been expected for ages.

Some years I make a lot of money from Berkshire stock, some years I don't. I think the coming year might be more like the latter.
If the current rally continues I may lighten up a bit more, or write covered calls, but I'm not leaving the party in a huff.

One thing for sure: if Apple's stock price languishes, we can certainly expect some badly reasoned articles on how Mr Buffett has lost his touch!
From the same people currently hailing his genius for the same pick.

I would have thought that a lack of pricing power (if that's the issue at play here) would be pretty damning for future value growth prospects even in a low inflation environment.

The hard part is determining the underlying reason for the weakness in profit trajectory at the operating divisions.
It's hard to disentangle all the moving parts, so all we can do is wait for a while and see what happens.
All the one-time issues will work their way through the system after a while, and we'll see what's left.
That's why the current results got me down a bit: I have been thinking the same thing for five quarters now, and the blip has not gone away yet.

For example, if it's a spike of wage inflation, then the pricing of our products and services can be expected to catch up and (mostly) restore the margins to normal.
If it's supply chain bottlenecks, they will return to some new normal and both Berkshire and its competitors will reach a new equilibrium on a level playing field at a new level.
If on the other hand we have just too many units that are getting old--towards the end of their years of above-average economics--that's a harder thing to fix.
For example, this article at the Economist makes me thoughtful--
https://www.economist.com/business/2023/05/02/the-...
(probably unavailable without a subscription - try searching on the title "The business trend that unites Walmart and Tiffany" )
Random snip: "...sales at Burlington, a discount department store, grew by 13.2% year on year in the first quarter of this year, compared with a decline of 4.2% for Macy's, a middle-class stalwart...."
In short, it discusses how luxury goods are doing very well, and deep discount goods are doing very well, but the middle ranges are really suffering.
Berkshire has quite a few brands in that middle range, predicated on the notion that things like Kraft and Dairy Queen will appeal to the middle class forever.

The article ends:
"Investors would do well to take note. Conventional market wisdom dictates steering clear
of businesses in 'discretionary' spending categories (cars, clothes and other non-essentials)
in favour of 'staples' (necessities such as groceries) in tough economic times. The new logic
of consumption suggests that the pedlars of the most essential fare can expect to do well as
the economy sours. But so can sellers of the exceedingly discretionary."
Maybe Berkshire needs some more luxury brands in the mix. Netjets counts, and in some senses Apple, but it's far from the majority.

Jim

Looks like the B's will be up between $5-$6 this morning.

+$9.51 as I write.

Told my wife yesterday that no-none knows nothin', but if pushed I'd expect Berkshire to go down today.

I have no idea what I'm doing. It's worked out well, though :-)

Quite the bump on top of an already decent price. I have not lightened up in years (usually a mistake), but I sold some in my IRAs today.

>> I have not lightened up in years (usually a mistake) <<

Hello old friend, I several times do have lightened up a little in years past. Result: Not only usually, but ALWAYS a mistake I did regret a few years later, with Berkshire continuing it's endless rise.


Nevertheless I might do that mistake again. The current price is tempting. But the question then is what better to do with the proceeds?

Using the current relatively high price to sell covered calls as Jim is contemplating is no interesting alternative for me, as I see getting around 1% for Jan'24 400s as peanuts only (Getting 3% for Jun'24 400s might be more interesting). Maybe I am just too greedy for that without doubt clearly very rational selling covered calls game. Either I sell a bit of stock or I contemplate the dark side: Buying Jan'24 320 puts with the (gambling) goal to make some short term profit.

Mhm, I just nearly did sell covered calls for the 1st time in my life. My order was to sell Jan'25 410s calls, limit 20.20. Because of the time difference Germany-New York I was not aware that I gave it 4min after the closing bell.

What do the "selling covered calls" specialists say to Jan'25? Too far out? My intention was to buy them back cheaper.

I'm a little surprised so many would be thinking about joining me in a bit of lightening up.
I am a well-known trading addict, so I have an excuse.

OK, so book per share isn't a perfect yardstick.
But price-to-known-book got up to 1.586 as recently as March last year.
Today's closing level of 1.458 isn't exactly exuberant, despite the rally and pop.

That being said, I did do a pinch of covering-calling today. Writing high-strike calls backed by my long positions.

My usual approach goes roughly like this:
Sell a covered call at, or only VERY slightly out of the money when the stock price seems rich and maybe toppy.
The reason for staying near the money is because that's where the time premium peaks. It's not really worth the bother at much higher strikes.
Pick an expiry maybe 3-4 months out.
If the market goes against you and you're losing money, you can "improve" your position by closing it at a loss and replacing it with a new position which is longer dated with a higher strike. Maybe another 3 months later.
Since your new higher strike is now roughly at the money, the time premium of your new position is high and peaking and the time premium in your old one has dropped...
it is generally possible to raise your breakeven notional exit price and also gather enough additional time premium to more than wipe out your loss-to-date.
A position can then be rolled a second time, if needed.
I have done this only occasionally over the years, as the price has not been very rich very often. Today barely counts.
But I have never actually had any stock called away...nobody sensible ever exercises an option that still has time value left, it's better to sell it.
If you pick your original time to start the position badly, you probably won't make meaningful money, but it's likely to be positive.
If you pick it well, it's nice gravy.

Today, I went a bit further out in date than I "should" have because I like January options (no good reason), and the Jan 2025 ones were only a little further out than I usually go.
I got a premium of $16.27 on strike of $370, for a notional exit price of $386.27/B = $579405 per share. That's 1.554 times current known book. (and book itself might be a pinch higher than trend)
Or, I end up just keeping the $16.27 as extra money for beer and pizza.
If the position moves against me and that annoys me, the idea is I could close them and write new ones a little longer date.
(this is the disadvantage of having picked an expiry 5 months out...the roll-out-to-improve-things strategy needs a good percentage increase in days to work)

Jim

Speaking of Jan. BRKB options, any thoughts on holding vs. selling to close a portion (or all) of Jan.2024 240 calls? Price has nearly doubled since purchase last Summer and are now in the LTCG category. No acute need for the cash, but just a consideration given the solid appreciation and already own a good bit of the stock.

Thanks & any opinions & commentary appreciated.

"Or, I end up just keeping the $16.27 as extra money for beer and pizza.

Do they even sell those two items in Monaco? And if they do, would you normally be a buyer?

Asking for a friend.

"Or, I end up just keeping the $16.27 as extra money for beer and pizza.
...
Do they even sell those two items in Monaco? And if they do, would you normally be a buyer?


I enjoy the novelty of ordering pizza delivered from a neighbouring country (France).
But not usually beer--
Last time, they asked me if I wanted a bottle of chilled champagne to go with it. I said "why not?", 20 euros extra.

Jim

Speaking of Jan. BRKB options, any thoughts on holding vs. selling to close a portion (or all) of Jan.2024 240 calls? Price has nearly doubled since purchase last Summer and are now in the LTCG category. No acute need for the cash, but just a consideration given the solid appreciation and already own a good bit of the stock.

I closed my Jan 2024 150 calls just short of my LTCG point. Less than a 2% drop in price over time would net me less with LTCG than STCG now.
Gift horse and all that...

re covered calls
If the market goes against you and you're losing money, you can "improve" your position by closing it at a loss and replacing it with a new position which is longer dated with a higher strike. Maybe another 3 months later.

Anybody want an example I did today?

The underlying stock was Berkshire, but fancy-shmancy option trading is otherwise OT so I'll skip it if nobody's interested

Jim

Anybody want an example I did today?

Who doesn't like a free education?

Jeff

As I have a portfolio over-weighted with BRK, and as I like to squeeze extra returns via buying DITM calls and selling covered calls, I do not consider it OT.

So yes, let's hear your example!

"Speaking of Jan. BRKB options, any thoughts on holding vs. selling to close a portion (or all) of Jan.2024 240 calls? Price has nearly doubled since purchase last Summer and are now in the LTCG category. No acute need for the cash, but just a consideration given the solid appreciation and already own a good bit of the stock."

I have the current price at about $136, with BRK.B trading at $362. So a breakeven of $377. Basically a 4% return, nominal and non-annualized, from here, to breakeven.

I sold out of my call options over the last little while on the premise that reasonable expectations (with respect to my contracts) from here were, at best, breakeven. That's how I'd view the Jan 24 240s if I were holding them. At today's book, for instance, you are betting that the BRK hits about a 1.51-1.52 ratio before the close of the year. Using today's book is a bearish assumption, of course, but with only 1 quarter remaining to report, it isn't too bearish.

I use options enough that I can't say they're a "special case", but I am reluctant to carry too much exposure during periods of relatively reasonable prices. What's the odds we return to 1.35-1.36 book, before 1.51-1.52, for instance? The former has been about the median result in recent history; the latter well into the upper quintile.

All of this is before getting to the value of adding the option to add leverage by closing out the options today.

For all the above, I wouldn't think of making the Jan24 240 trade today, and I'd be pretty reluctant to keep holding it. But I admittedly do have a habit of bringing in my winners a little early.

Well 240 + 136 is $376, not $377, but you get my point.

If the market goes against you and you're losing money, you can "improve" your position by closing it at a loss and replacing it with a new position which is longer dated with a higher strike. Maybe another 3 months later.
...
Anybody want an example I did today?


Not a great example, not one of my best efforts.

But FWIW:

In July When BRK.B was trading at just under $350 I wrote January $350 calls for a premium of $19.35 net of commissions.
In effect, a wager that I'd be more or less equally happy with either $19.35 of "bonus" income between now and January, or with a net exit price of $369.35 on some shares (which looked not bad with the price a tad under $350).
Adding this call to an existing position is a slightly bearish move: moving some shares from long to neutral. The price looked high enough that a bit of lightening up didn't seem so bad.

Now, let's assume that I've changed my mind about the likely price trajectory.
The price is quite a bit higher than $350 already, so the original position is in a mark-to-market loss, and it's obvious that ~$369.35 is no longer particularly unlikely. It's only 1.6% above the price now.
So, is there a way to adapt the trade to a higher price expectation?
(This is not something you plan to do--it's something you might want to do when you're already a bit wrong!)

As an aside, the existing $350 calls are only a mark-to-market loss: if the stock price were entirely flat from now till expiry, they would still end in a profit position because today's price of ~$363 is less than the breakeven of $369.35.
I could just sit on my duff and wait for them to make money, but I didn't.

So, I closed my January $350 calls at a loss, and wrote new January $365 calls instead.
The time value in the $350s has fallen a lot, from the original $19.35 to $16.89.
This is because time value peaks when the stock price is at the strike price. As the stock has moved up, the time value has fallen.
So, that takes a few dollars of sting out of the mark-to-market loss I'm now realizing because the calls I wrote are now in the money by about $12.90.

So, the trades, including commissions:
Buy to close Jan $350 calls for $29.79, breakeven $379.79
Sell to open Mar $365 calls for $23.91, breakeven $388.91

The changes resulting from today's trades, relative to not having done them:

Outcome 1:
If the stock is high around next March, the underlying long positions get called away. My net sale price is improved by $9.13 per share relative to yesterday's situation.
However, the trade ties up more cash: I put in $5.87, "giving back" part of the $19.35 cash I originally received on opening the position.
So, in the scenario that the stock price is high and the shares are called away, I tie up $5.87 till March in order to get $9.13 more cash for my shares.
So, today's *incremental* trades could be thought of as a return of 55% on the additional cash tied up, or 91%/year rate.

Outcome 2:
In the scenario that the stock price stays lowish and the calls expire worthless, I get a lower net cash profit.
The original maximum profit falls from $19.35 to $13.48. This is worse, but still good.
It's unfortunate that the cash return is worse: it would not be the case if I had increased time duration of the calls by more by choosing a different roll.
Usually I'd be rolling perhaps 3 months to 6 months, not 5 months to 7 months.
You're only kicking the can down the road, but you do get paid for each additional kick. I can kick it again later if I want...each day that goes by, I earn a bit more of the time value.

Also:
By having a higher strike, outcome 2 (options expire and I keep the premium) becomes more likely than it would otherwise have been, since the strike price is $15 higher than it was.


One of the reasons you get this opportunity is that the time value in an option moves up and down a lot during its lifetime as the *distance* between strike price and current stock price narrows and widens.
If the stock price goes back down it could make sense for me to do the reverse trade, improving my breakeven at each trade.
But usually if the stock price falls I just close the trade for a nice profit. You can often make 80% of the maximum possible profit in under 50% of the maximum possible elapsed time.
Stock feeling high and toppy? Write a call. Down again? Close for profit.


Bottom line:
If you've written a covered call but now for whatever reason don't like the now-higher probability of the stock being called away, roll the position "up and out".
Higher strike, longer time to expiry, generally just as much cash profit if it expires, though it takes a bit longer.
When done at the right time and pricing and date selection, you can improve your cash position at the same time as improving the odds of the cash outcome which you may prefer.

Jim

Speaking of Jan. BRKB options, any thoughts on holding vs. selling to close a portion (or all) of Jan.2024 240 calls? Price has nearly doubled since purchase last Summer and are now in the LTCG category. No acute need for the cash, but just a consideration given the solid appreciation and already own a good bit of the stock.

As it happens, I have some of that same contract.

My suggestion is not to think of this as an individual trade.
Rather, just think of that as part of your total long term Berkshire share position. (which might change in size in future, or not)
Separately, part of your total Berkshire allocation has been funded with a non-callable loan of $240 per share which will come due next year. The interest has been prepaid.

You're paying an interest rate of about 5.7%/year for the (small) portion of your total Berkshire position which is funded with the loan.
(That's based on the time premium you'd realize if you closed the position right now)
Since inflation is likely to run at 4-4.5% in the next several months, the real interest rate is probably in the vicinity of about 1.5%/year rate.

I think the comments above represent a very useful way to think about your position.

Now, I'll add a couple of comments of a more speculative nature on what that might imply:

I presume the implied loan amount is a quite small fraction of your total Berkshire position's face value: all of them, shares and options combined.
So, maybe Berkshire's stock has to rise in value at (say) only inflation + 0.5%/year rate or less for you to break even after interest expense, maybe less.
Needless to say, that isn't a big hurdle. The interest expense is not going to turn your overall Berkshire investment from a profit into a loss.

So, without saying anything about what I think the price of Berkshire will do in the next 6 or 12 months, this view suggests that having calls isn't necessarily something you can justify ONLY when the stock is cheap and the short term prospects are really good.

For so long as long dated call options are available at fairly low real interest rates, a person could hold some of their position as calls at all times.
This has the advantage that you don't have to spend a lot of time figuring out when it's cheap and when it's expensive and adapting your strategy.


I'm not making a specific recommendation. But one can at least contemplate the notion that simply keeping the options long term would be fine.
At some point, and periodically, you'd roll them to a later date.
Preferably on a date that
* it's long enough before expiry that you're capturing some remaining time value. (that evaporates quite quickly in the last 2-3 months before expiry);
* the stock price is high;
* the market is calm; and
* the anticipated/implied interest rates are low.
Today counts well on the first three, but my gut feel is that we might see some improvement on the last one in the next few months, so maybe (?) rolling later might be better?

Jim

Many Thanks Jim & Lear for generously sharing your wisdom and perspective & helping me take a deeper breath & consider All alternatives more thoughtfully. May just sit tight for now and revisit the decision in 6-8 weeks.

Enjoyed the tangible covered calls example as well.

So, I closed my January $350 calls at a loss, and wrote new January $365 calls instead.
The time value in the $350s has fallen a lot, from the original $19.35 to $16.89.
This is because time value peaks when the stock price is at the strike price. As the stock has moved up, the time value has fallen.
So, that takes a few dollars of sting out of the mark-to-market loss I'm now realizing because the calls I wrote are now in the money by about $12.90.

So, the trades, including commissions:
Buy to close Jan $350 calls for $29.79, breakeven $379.79
Sell to open Mar $365 calls for $23.91, breakeven $388.91

I don't understand in what sense $379.79 is a breakeven?

The net premiums received are: +19.35 - 29.79 + 23.91 = +13.47

And with the $365 call, isn't your new breakeven = 365 + 13.47 = $378.47

Always willing to be wrong ...

Speaking of options I hope somebody can explain this which baffles me:

Yesterday for the first time in my life I sold covered calls: BRK/b - 01/19/24 - $380. I paid $11.20.
Instead of as intended a few months later I closed that position 1 hour ago, paying $8.50.

Berkshire stock is falling 1% or so in that single day --- and those calls a full 24%! And that's not an accident, caused by eventually super low volume with that specific call. Yesterday I also bought Jan $390s. And they are also currently 22% lower than yesterday!

How is this possible? They don't have a lever of 25 or so. Or do they? I just don't understand this.

And they are also currently 22% lower than yesterday!
How is this possible? They don't have a lever of 25 or so. Or do they? I just don't understand this.

They did indeed change in price that much. And they do indeed have a lot of leverage.


It makes a very big difference how far the stock price is from the strike price. A small change in that gap can result in a big change in price.

At any given moment, the amount that the price of the option will change, given a $1 change in the price of the underlying stock, is called the "delta".
(the delta itself changes with time and distance from stock price to strike, which is why I say "at any given moment").

Mid afternoon yesterday, the stock was around $363.50 and that option was around $7.25.
At close today, the stock was $358.02 and the option was around $5.45.
So, the stock moved down by around $5.48 and the option moved down by about $1.80, meaning that option had a delta of about 0.33.

The option is very cheap in absolute terms relative to the stock.
So even though the option price moved only 33% as much as the stock price in dollar terms, that still means a big percentage change in the (small) option price.

Yes, these options are very high leverage. The stock price was 50 times the option price yesterday.
But the leverage ratio varies quite a bit depending on precisely where the stock price is relative to the strike price on any given day.
At the moment, the leverage is around 66:1

Jim

Buy to close Jan $350 calls for $29.79, breakeven $379.79
Sell to open Mar $365 calls for $23.91, breakeven $388.91
...
I don't understand in what sense $379.79 is a breakeven?


The first line is describing the situation of the position I had before the trades, assuming I did nothing more till it expires.

The old position ($350 call written for a premium of $29.79) had a breakeven of $379.79 in the sense that, had the stock price been high on expiration date, that's how much money I would have received for my shares that got called away.
$29.79 that I received on the day I wrote the call, and another $350 on the day that the option expired and the shares were called away.

If the stock price were to end up in the range $350-379.79, the stock would have been called away, and I'd have done better having written the call than having sold the shares on expiration day. Call good, selling stock bad.
If the stock price were to end up higher than $379.79, the stock would have been called away, and I'd have done better not having written the call, then simply selling the shares on expiration day. Call bad, selling stock good.
If the stock price were exactly $379.79 on expiration date, the stock would have been called away but it would be a wash: the breakeven point between the two cases above.

If the stock were below $350 on expiration day I'd have just pocketed the $29.79 premium.

Jim

The old position ($350 call written for a premium of $29.79) had a breakeven of $379.79 in the sense that, had the stock price been high on expiration date, that's how much money I would have received for my shares that got called away.

Ok, I think you mixed up two numbers then. Originally you typed:

In July When BRK.B was trading at just under $350 I wrote January $350 calls for a premium of $19.35 net of commissions.

$29.79 is what you paid to close the original calls.

In July When BRK.B was trading at just under $350 I wrote January $350 calls for a premium of $19.35 net of commissions.
...
$29.79 is what you paid to close the original calls.

Yes, sorry. My mistake. Duh.

I was trying (but failing) to describe the original situation!
Breakeven = strike + premium collected

The breakeven for the original position was indeed 350+19.35 = $369.35.

Jim

More 2Q commentary, links courtesy of Rationalwalk:

Kingswell:
Some Thoughts on Berkshire Hathaway's Q2 2023 Performance
In the second quarter, Berkshire's elephant gun turned into a bazooka

https://www.kingswell.io/p/some-thoughts-on-berksh...

Bloomstran:
https://twitter.com/ChrisBloomstran/status/1687913...

Conclusion: 'All in strong insurance, little to do on cap allocation outside growth capex. Modest share repos. Net equity sales. Weak industrial and housing volumes. Growing dry powder. You get the sense Berkshire is waiting around for something to happen. It always does. Great quarter, guys.'

Also, from Tilson's recent Daily email- his current BRK simple 2-prong IV and commentary:

'I've used a consistent method to estimate Berkshire's intrinsic value for the past two decades, which I believe is similar to the one Buffett uses: take the cash and investments per share and add the value of the operating businesses.

At the end of the second quarter, cash and investments were $380,000 per A-share. Since then, Berkshire's stock portfolio has risen by $8,000 per share, so that's $388,000 today.

Berkshire's pretax operating earnings over the past 12 months were $19.1 thousand per share (excluding volatile insurance and investment income, but adding back an estimated $1.4 billion of annual normalized insurance earnings). To this, I apply a conservative below-market multiple of 11 times to arrive at a value of $210,000 per share.

Thus, my estimate of Berkshire's intrinsic value is $388,000 (investments) plus $210,000 (operating businesses), for a total of $598,000 per A share or $399 per B share.

The A-shares closed yesterday at an all-time high of $551,920, meaning that the stock is currently trading at an 8% discount to my estimate of its intrinsic value.

That's the smallest discount since the stock hit its prior all-time high in March of last year, but I still like it because it's still somewhat undervalued, incredibly safe, and its intrinsic value is growing nicely.

That said, it's important to have reasonable expectations...

Given its moderate undervaluation today, I think over the next five years, Berkshire's stock is likely to do perhaps two percentage points (compounded annually) better than the S&P 500. In other words, if the S&P compounds at 5%, I'd expect Berkshire will do 7%.'

' Given its moderate undervaluation today, I think over the next five years, Berkshire's stock is likely to do perhaps two percentage points (compounded annually) better than the S&P 500. In other words, if the S&P compounds at 5%, I'd expect Berkshire will do 7%.''


This prediction sounds a bit weird, at least to me. If Berkshire increases book value in the vicinity of 10 percent per annum (as it has been doing and is expected to continue doing, at least for the next 10 years, per Mr. Buffett), then the stock return will also be around 10% per annum, unless one expects the P/B multiple to fall. This prediction is independent of the performance of the S&P 500.

It is true that a significant portion of Berkshire's equity is in stocks, which are expected to fall if the S&P 500 falls. However, the S&P 500 is significantly overvalued (regardless of whether one looks at Shiller CAPE or market cap to GDP ratio). Can the same be said about Berkshire's publicly listed holdings (even after accounting for Apple)? If not, the longer term returns from the latter may be a few points higher than those of the S&P 500. In conjunction with the increase in value of the non-publicly listed portfolio, Berkshire may return several points more than the S&P 500 over the next 5 years, assuming both trade at fair value then.

Thoughts welcome.

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