Category: Your Money

Buffett’s $1 billion bet on a basketball contest

We had discussed how an options trader can think of himself as The One Man Insurance Company (TOMIC.) Now Warren Buffett has gone out and insured a $1 billion basket ball contest.

The contest

The National Collegiate Athletic Association’s (NCAA’s) tournament consists of 63 games. A contestant who accurately predicts the outcome of each of those games wins $1 billion. The contest is sponsored by Quicken Loans. Warren Buffett’s Berkshire Hathaway has insured the prize money.

The ods

A blind guess has a one in 9.2 quintillion chance of winning.

If the average person submitting a bracket had a 78.6% chance of getting each game right, and the maximum 10 million people sent in their brackets. What is the likely number of correct brackets? One.

Buffett keeps the premium

Aleph Blog:

Every tournament has significant upsets. Someone who has a good understanding of how good the teams are will know how to pick the most likely team to win. It is tough to pick the upsets, and tougher to pick all of the upsets. There is no good model for upsets, or they wouldn’t be upsets.

 

This is the proverbial “fat pitch” of options trading. The chances of winning are so low but the payoff is so large, that both the option buyer and the option seller can agree on a reasonable premium and get the deal done.

Sources:

Tough for Buffett to Lose this One
Warren Buffett Bets $1B You Won’t Pick Perfect NCAA Tournament Bracket

Categories Tags

A Re-balancing China is Good for India

China’s Flash Manufacturing PMI numbers for January came out yesterday and sent markets tumbling across Asia and America. The Dow ended down -1.07%, S&P -0.89%, European markets down about -1%. The Nikkei has opened down -1.45%.

china manufacturing pmi

china pmi

Knee-jerk reactions aside, the PMI print is exactly what a re-balancing Chinese economy would produce. One of the items in their third plenum reform plan was to transition to an economy less dependent on massive government investment and more driven by consumption, innovation and market forces.

As far as the India story goes, China is the biggest consumer of commodities in the world. Its hunger for raw materials put into motion the “commodity super-cycle.” Until China came into the picture, commodities, as an asset class, was out of favor. The prices of most commodities are capped by the price at which a suitable substitute is available. For example, when aluminium prices shot up, aircraft and car manufacturers responded by switching to carbon-fiber. It was Chinese demand that put commodity prices into a different orbit.

As commodity prices correct, the pressure on the Indian current account will ease. This, combined with the recovering US and European economies will prove to be a tail-wind for the Indian services sector.

eurozone pmi

Irrespective of where the market opens today, in the long-term, a Chinese economy that is less reliant on investment driven growth is a net positive to India.

 

Source: Markit

 

Related articles
Categories Tags

The One Man Insurance Company

I am recently reading a book bombastically titled “The Option Trader’s Hedge Fund” (Amazon). In that the author says that the best way to look at option trading is to think of it as an insurance business. So if you are an options trader, you should think of yourself as The One Man Insurance Company (TOMIC).

TOMIC

It sort of makes sense because what you are doing when you are trading options anyways? You are buying and selling insurance of some kind with different co-pays and terms. If you are hedging your positions then you are “reinsuring”, etc.

The chapter on volatility was insightful. It discusses the impact of ATM options price in the near term, volatility skew, and term structure on implied volatility. Its a useful framework to have.

Overall, its an interesting book that’s worth a read.

Categories Tags

M&M Financial: A floozy or a doozy?

M&M Financial reported its 2013 Q3 results yesterday. As a long-time investor in the stock, it raises a couple of questions.

Is it a floozy?

Did news leak out of the bad numbers ahead of the announcement?

Mahindra Financial Services Limited

The stock was at Rs. 240.00, down -5.57% at the time this post was written.

Is it a doozy?

Net NPA went up to 2.2% compared to 1.6% during the same period last year. Was it a kitchen-sink quarter? Not really, as their presentation shows, NPA has been steadily rising, costs have been rising and return on assets has been coming down, consistently since 2011.

Mahindra Financial results

Right now, M&M Financial is looking like both a floozy and a doozy.

Categories Tags

Disruption in action

Long-term investing requires investors to understand the nature of innovation. No industry is safe from it, incumbents are constantly battling it and new business survival depends on it. The previous post briefly mentioned how Circuit City (filed for bankruptcy in 2009) was disrupted by Best Buy and was disrupted by Amazon. And, as it turns out, Amazon is now faced with similar disruption from Alibaba.

Before we discuss Alibaba, here’s the contrast between Best Buy and Amazon stock prices:

Best Buy Chart

 

Amazon chart

The business models of Amazon and Alibaba are different:

  1. Amazon has low margins (e-commerce), Alibaba has no margins (market-place monetized by ads)
  2. Amazon’s openly searchable and indexed website vs. Alibaba’s walled garden
  3. Amazon needs to make a sale in order to make money, Alibaba only needs visitors to search for something and browse through its pages

But if Alibaba can gain a foothold in the US, then it has to potential to impact Amazon’s economies of scale.

Juan Pablo Vazquez Sampere has this to say on the HBR Blog:

There are two possible ways in which Amazon can fight back:

  1. Amazon doesn’t react to this new challenge and continues focusing on its most profitable customers
  2. Amazon creates an independent business unit using Alibaba’s revenue model

 

Here’s the dilemma faced by investors:

  • e-commerce in the US is still a growth industry
  • e-commerce is still disrupting brick-and-mortar businesses
  • Amazon is still a dominant force in the e-commerce space in the US and is aggressively expanding overseas
  • Amazon is likely to lose money on low-margin businesses if it chooses to defend them against Alibaba, putting further pressure on its bottom-line
  • If Amazon decides to cede low-margin businesses and instead focus on extending the brick-and-mortar disruption that it had created, then it allows Alibaba to get a toe-hold. This is how most disruptive companies got their start
  • Both Jeff Bezos and Jack Ma are extremely competent leaders

 
Should investors hold or fold?
 
 

Related articles
Categories Tags