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No. of Recommendations: 18
Looks like a surprisingly good chance we'll crack $200k this year.

Possible numbers:
$132,500 end-2013 book
8% growth in book/share from end 2013 to end 2014
Trading at 1.4x end-2014 book by end-2014

None of these seems to be a big stretch.
It basically depends on whether Berkshire is in or out of fashion late in the year.
If it's in, or close to in, $200k seems entirely doable.
Even if not, I expect the average price in 2015 will start with a "2".
Always nice to start in on another round number.

On the downside, I wouldn't be shocked to see the current modest valuation
levels persist for quite a while. Might average 1.35x book for a few more years.
But even that doesn't preclude the occasional visits to 1.4-1.5x.

For those who like price to book, I have a table of the ratio of the average trade
price in any given calendar quarter to the book/share value at the end of the quarter before.
e.g., book/share in Q3 statement versus average price in Q4.
Average of that ratio 1996-1999: 2.065x
Average of that ratio 2000-Q3/2008: 1.636x
Average of that ratio Q4/2008 to present: 1.278x
I presume that trend will not continue.

Jim
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No. of Recommendations: 1
80 strike 2016 leaps are looking like a good deal here. Budgeting for a single rollover gives a break even of just 125 in 2018 implying a very low probability of actual loss. The upside is quite good as an optimistic scenario of 10% book growth and a terminal P/B of 1.5 gives a return of over 20% p.a. That looks like a good risk reward scenario to me!
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No. of Recommendations: 4
80 strike 2016 leaps are looking like a good deal here.
Budgeting for a single rollover gives a break even of just 125 in 2018 implying a very low probability of actual loss.
The upside is quite good as an optimistic scenario of 10% book growth and a terminal P/B of 1.5 gives a return of over 20% p.a.
That looks like a good risk reward scenario to me!


Me too.
I have rather a lot of the Jan 2016 calls.
If you don't have the pile of cash on hand required to exercise the calls if necessary it's
arguably not an investment but a speculation, but it's a really good speculation.

As far as I can tell the main risks are
(a) The price is below your strike at expiry, so you lose it all, and
don't have enough cash to keep the position open with another roll.
Possibly in combination with...
(b) The price is low at expiry and you need to roll them, but the
required 2018 LEAPS for the roll don't exist or are prohibitively pricey.
and perhaps...
(c) Even 2018 isn't long enough...the price stays very low for 5+ years.

Jim
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No. of Recommendations: 1
I'm more interested in when the shares hit $300,000. It probably will not be very long. I view $200K as a conservative figure for intrinsic value today. Assuming 9% compounding of book value over five years, IV would exceed $300K in five years. But Mr. Market is usually moody when it comes to Berkshire, so we may not actually see $300K until 2020 or so. Anyone who is very familiar with Berkshire should be thinking about that likely return from now until 2020 when considering any alternative deployment of funds into equities.
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No. of Recommendations: 3
80 strike 2016 leaps are looking like a good deal here. Budgeting for a single rollover gives a break even of just 125 in 2018 implying a very low probability of actual loss. The upside is quite good as an optimistic scenario of 10% book growth and a terminal P/B of 1.5 gives a return of over 20% p.a. That looks like a good risk reward scenario to me!

Call me irrational but I would hesitate to buy any calls on Berkshire and would much rather buy the stock. The reason is simple, no time premium on the stock. The consideration that trumps all time-bound strategies is Buffett's death. It would be unfortunate if he passes away in December 2015, leaving folks sitting in cash to act on his one and only stock tip to buy Berkshire while the folks holding calls are left with massive paper losses.
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No. of Recommendations: 4
I'm more interested in when the shares hit $300,000...
we may not actually see $300K until 2020 or so.


I'm on record saying that will happen (at least briefly) by December 2021.
http://boards.fool.com/one-decade-29710691.aspx

Funny, it seems a lot more plausible now than it did then.
What a difference two years (and a $55961/share = 48% rise in price) make to one's views of what's possible.

The bigger question is perhaps "what's the buying power of $300k going to be at that time?"
I hope there is no dollar crash.

Jim
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No. of Recommendations: 1
Call me irrational but I would hesitate to buy any calls on Berkshire and would much rather buy the stock. The reason is simple, no time premium on the stock. The consideration that trumps all time-bound strategies is Buffett's death. It would be unfortunate if he passes away in December 2015, leaving folks sitting in cash to act on his one and only stock tip to buy Berkshire while the folks holding calls are left with massive paper losses.

Just to play devil's advocate, maybe Buffett's age is already banked into the price? Maybe that's the "Buffett penalty" we keep hearing about.
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No. of Recommendations: 6
leaving folks sitting in cash to act on his one and only stock tip to
buy Berkshire while the folks holding calls are left with massive paper losses.


I can't defend calls as a virtuous investment, merely an evil speculation.

But at least if one uses the maxim to have access to the cash necessary
to exercise the calls if need be, then this isn't a problem.
I have a much bigger cash balance *because* I own calls rather than stock.
The call buyer can have way more cash, or more upside, or a mix of the two as I do.
That cash pile can be used in a number of different ways, depending on circumstances.

The reason is simple, no time premium on the stock.

Yes, it hurts your breakeven.
But, given my available funds and starting today, would I rather have for
a four year hold X shares at breakeven $116 or 2.9X shares at breakeven $126?
That's roughly the math on $80 calls today, assuming they are rolled to Jan 2018 for only a bit more than the roll cost now.
Is $10 extra too much to pay, given that the value is going up around a buck a month in those 48 months?
The devil has many temptations to lay out before you...

Jim
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No. of Recommendations: 2
"The devil has many temptations to lay out before you..."

I hear you. For some it's adultery, or gluttony, but little did I know the devil would appear to me as "DAVITA 2016 CALL OPTION".

Up 60% in a few months ... the chocolate cake tastes so good as it's going down but hopefully I don't wake up in the morning in a food coma.
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No. of Recommendations: 4
This conversation reminds me of the old Buffett quote: "Never risk what you have and need for what we don’t have and don’t need."
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No. of Recommendations: 2
I hear the warning messages regarding the risks but I think with some care they are extremely manageable. In my case, I always keep a fair amount of cash around for various reasons so even a relatively expensive rollover or making a purchase in case of a large drop should not be a big problem (this is not even taking into account the transferring of capital from other investments). The one scenario where the risk can come home to roost is if Berkshire's stock price drops to around its -current- book value by 2016 making for an expensive rollover while the S&P continues its rise (as I have a partial hedge with S&P futures and options, a fall in the overall market should be fine) and most of my other ideas fail. Based on past history and reasonable considerations, the probability of this is low enough for me to be comfortable with. On the other hand, I put the probability that this does better than owning the shares with 2 or maybe 3 rollovers at over 80% (80% should be conservative), particularly if am sure to convert to shares if it ever reaches a reasonable estimate of IV.

I don't think that lack of LEAPs will ever be an issue given how capital markets have evolved in the past. Despite the high implausibility, I should nevertheless note that such an event will no doubt cause a major issue for this strategy.

There is no doubt that holding the calls is more speculative than holding Berkshire but I think, given the current Shiller P/E, that it might be less speculative than holding SPY provided one keeps to it for the next 4-6 years.
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No. of Recommendations: 0
>That's roughly the math on $80 calls today, assuming they are rolled to Jan 2018 for only a bit more than the roll cost now.
From a planning perspective.

What would be a good time to roll? Time decay would indicate 3 months before expiry, but price of options wise 12 month before seems better?

And what strike price to roll?

Thanks!
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