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Advice Pool - Buffett's Big Bet
Over the past few days, there have been several stories written about Warren Buffett’s $14 billion bet on global stock markets. I believe these stories are all in reference to this excerpt form Berkshire Hathaway’s annual report:
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
“Berkshire is also subject to equity price risk with respect to certain long duration equity index put contracts. Berkshire’s maximum exposure with respect to such contracts is approximately $14 billion at December 31, 2005. These
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
ontracts generally expire 15 to 20 years from inception. Outstanding contracts at December 31, 2005, have been written on four major equity indexes including three foreign. Berkshire’s potential exposure with respect to these contr
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
acts is directly correlated to the movement of the underlying stock index between contract inception date and expiration. Thus, if the overall value at December 31, 2005 of the underlying indices decline 30%, Berkshire would incur
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
pre-tax loss of approximately $900 million.”
It’s impossible to evaluate what exactly this means for Berkshire or what it tells us about Buffett’s thinking without knowing more details. But, there are a few things I’d suggest you
It’s impossible to evaluate what exactly this means for Berkshire or what it tells us about Buffett’s thinking without knowing more details. But, there are a few things I’d suggest you
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
consider when reading the news reports.
First, the $14 billion headline number makes this bet look larger than it really is. According to the above disclosure, a 30% decline in the underlying indices would only create a $900 mill
First, the $14 billion headline number makes this bet look larger than it really is. According to the above disclosure, a 30% decline in the underlying indices would only create a $900 mill
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
on pre-tax loss. One article stated that a decline in the indexes to zero was highly unlikely given historical trends. It’s a lot more than highly unlikely. But, since we don’t know the details of Berkshire’s exposure, we can’t eva
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
luate the real risk of a very large loss.
A lot of these news stories have called Berkshire’s “long duration equity index put contracts” a bet on global stock markets. A few individuals have been quoted as saying Buffett has becom
A lot of these news stories have called Berkshire’s “long duration equity index put contracts” a bet on global stock markets. A few individuals have been quoted as saying Buffett has becom
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
bullish long-term. Buffett’s always been optimistic about the very long-term insofar as he recognizes how better things are today than they have been at any other time in history, and how that is likely to remain true for some tim
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
e. Despite Buffett’s concerns about nuclear war, he doesn’t see a return to the Dark Ages and those kinds of anemic returns on capital.
That’s important to keep in mind, because I’m not sure this bet is much more than that. If you
That’s important to keep in mind, because I’m not sure this bet is much more than that. If you
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
assume returns on equity will be similar to those achieved in the years since industrialization began, and you assume central governments will continue to cause inflation, a long duration equity index put contract isn’t much of a s
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
retch.
Equity will earn returns, much of those returns will be retained by the businesses, and inflation will increase (nominal) stock prices regardless of whether the underlying businesses’ assets are increasing or remaining stab
Equity will earn returns, much of those returns will be retained by the businesses, and inflation will increase (nominal) stock prices regardless of whether the underlying businesses’ assets are increasing or remaining stab
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
le.
So, I’m not sure this is a bullish sign. In fact, it may be a bearish sign, because it suggests Buffett can’t find individual equities to buy, three of the four indexes are foreign, and someone wants to be protected against ve
So, I’m not sure this is a bullish sign. In fact, it may be a bearish sign, because it suggests Buffett can’t find individual equities to buy, three of the four indexes are foreign, and someone wants to be protected against ve
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
y large losses in a diversified group of holdings.
Remember, someone is paying for this protection. In my opinion, it’s not the kind of protection investors need. It’s long-term protection on an index. I suppose I can see why a pe
Remember, someone is paying for this protection. In my opinion, it’s not the kind of protection investors need. It’s long-term protection on an index. I suppose I can see why a pe
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
nsion fund might want this (to increase exposure to equities), but it seems like exactly the sort of thing an insurance company can make money selling. There’s fear of a very large loss, and a lot of factors that are hard to see th
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
t will tend to make that loss pretty unlikely.
We don’t know what premiums Berkshire is receiving, so we really can’t evaluate these contracts. If someone writes hurricane insurance it doesn’t mean they think hurricanes are unlike
We don’t know what premiums Berkshire is receiving, so we really can’t evaluate these contracts. If someone writes hurricane insurance it doesn’t mean they think hurricanes are unlike
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
ly, it just means they think someone is dumb enough to pay more than the protection is worth. Knowing the odds of a decline in global stock markets isn’t enough to evaluate Berkshire’s contracts, because we don’t know the price.
I
I
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
m not enamored with current valuations in the U.S., but looking out a couple decades it’s not all doom and gloom. Markets tend to overshoot in both directions, but there’s usually someone sane enough to buy when stocks get cheap en
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
ough.
What’s remarkable about the way investors move stock prices isn’t the magnitude of the truly major moves (up or down); it’s the frequency of meaningful moves when there’s no meaningful changes in underlying values. Think abo
What’s remarkable about the way investors move stock prices isn’t the magnitude of the truly major moves (up or down); it’s the frequency of meaningful moves when there’s no meaningful changes in underlying values. Think abo
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
t the price range of an average stock in an average year – that’s the really irrational part of investor behavior. I wouldn’t want to have anything to do with a one-year contract on a single stock. That’s a very different situation
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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