“Davidson” submits:
I do some teaching. My materials are typically public sources which often contain gems others overlook because they do not have a context. I tell students you must develop long term context to understand how value is created. Buffett has done this.
How did Buffett know that the puts he issued would work out? The answer lies in the fact that they were long term and he set the expiration date, they could not be exercised against him at a time not of this choosing. To understand how Buffett thinks one needs to look at the performance of markets (SPY) long term, i.e. 70yrs. From this perspective you can see why he felt he would make this bet.
Being forced into a long term perspective is the most difficult shift a student can make because there is an enormous pressure in the world to be successful over the short term. Success really comes over time by making consistently good decisions using a long term perspective.
Danaher’s history is actually far better than Buffett’s because Buffett uses ‘margin’ and Danaher has not.
Buffett Climbs From Derivative Hole That Swallowed Berkshire AAA (BRK-A) (BRK-B)
by Noah Buhayar
5:00 AM EDT
May 7, 2015
Warren Buffett’s derivatives wagers sapped earnings during the financial crisis at his Berkshire Hathaway Inc. and were part of the reason the company lost its triple-A credit rating. Things are looking rosier now.
Liabilities on the contracts shrunk to $3.5 billion on March 31 from about $15 billion six years earlier. Some of the derivatives are long-term bets that equities will rise, while others protect bondholders against losses if borrowers fail to meet their obligations.
Surging stock indexes in the U.S., U.K., Europe and Japan and a stronger dollar have helped reduce the liabilities on the equity-linked derivatives for years. The improvement accelerated in the first quarter, helping profit climb 9.8 percent to $5.16 billion, according to a company report Friday.
“Unless the world falls apart over the next couple of years, it’ll be another bet that he’s won,” said Meyer Shields, an analyst at Keefe Bruyette & Woods.
It didn’t always look that way. Liabilities on the derivatives ballooned during the financial crisis and contributed to a first-quarter loss in 2009. Moody’s Investors Service and Fitch Ratings cited the contracts when they stripped Berkshire of its top credit grade that year.
