Is Warren Buffett blind to tail risks/risks of ruin?

Discussion in 'Risk Management' started by Daal, Feb 1, 2017.

  1. Daal

    Daal

    I dont have that much problem with his puts trades on Berkshire. What I don't understand were the personal risks he was taking, taking his personal account (which I believe was around $100M a few years ago) and doubling down on US equities. Had he been wrong and the US faced a depression, he would face some severe losses from everywhere. When you are so rich, why take the chance? Why not stash away $25M around the globe just in case. Unless he wasn't telling the truth that up to 100% of his non-BRK worth was going to US stocks
     
    #11     Feb 2, 2017
  2. newwurldmn

    newwurldmn

    My guess is that he couldn't buy a lot of stock through Berkshire because of its problems at the time. And he was asked by Obama to help improve investor confidence. Warren has earned a brand and he is willing to sell that brand for investment returns (like his Goldman, GE, and Bank of America preferreds)
     
    #12     Feb 2, 2017
    777 likes this.
  3. IMHO, Buffett's trades were genius on a whole variety of levels...
     
    #13     Feb 2, 2017
    777 likes this.
  4. Daal

    Daal

    The puts? Probably. But the personal investments, I'm not so sure
     
    #14     Feb 2, 2017
  5. newwurldmn

    newwurldmn

    I agree.
     
    #15     Feb 2, 2017
  6. I don't quite see why you think it was the wrong thing to do for his PA. Obviously, I assume that it wasn't levered
     
    #16     Feb 2, 2017
  7. Daal

    Daal

    I explained already several times. Depression risk represents ruin or at the very least, if you consider the chance of that, then 100% in US equities would be an 'overbet' according to the Kelly criterion (so it would produce long-term negative returns despite positive expectation).

    It almost doesn't matter how many benefits (financial) he saw on the trade, the downside risk trumped that and called for a more conservative allocation
     
    #17     Feb 2, 2017
  8. I think I need this to be explained a bit more to me...

    How precisely do you define "ruin" for Warren Buffett's unlevered PA account?
     
    #18     Feb 2, 2017
  9. Daal

    Daal

    If you lose 90%, you are a lot closer to losing 100% then if you don't lose that 90%. Many equity markets around the world have gone to 0. Risk of ruin increases the worse the depression is. Historically the worst US depression sent stocks down 90% but market history shows that if anything, new records are set the more data comes in. Who is to say that in the next 100 years, there won't be a depression that is worse than the 30's? Very unlikely but possible. Also, who is to say that you can't have a depression that just wipes out all equity holders if that leads to social unrest and a revolution like it happened in Russia or Cuba (where stock holders lost 100%). There are lots of unknows and tail risks associated with stocks, when things are down 90%, its not looking good for anyone that is concentrated
     
    #19     Feb 2, 2017
  10. Well, I daresay that in a scenario where you have a revolution, you're gonna have to deal with rather more pressing issues than drawdowns.

    In fact, this could have been the logic. If you are reasonably certain that the "ruin" scenario is one where there are people with pitchforks and torches burning down your house, you might as well go all in, with a hedge in a form of a nuclear bunker stuffed with supplies. Of course, if you're 80 at the time, you might wanna skip the hedge.
     
    #20     Feb 2, 2017