Monday, March 19, 2007

Buffet's gambit

Berkshire profits up 56% year on year.  Impressive.

However, the REcapitulator, would like to simplify the way Mr. Buffet makes his money.

1.  Sell thousands of out of the money binary put options.  In the insurance lexicon this means sell property and hurricane exposure policies with defined policy limits.

2.  Price said options using a one-year history of data, with that year containing the worst hurricane in 100 years.  As an aside, The REcapitulator is aware of the non-gaussian and epistemological difficulties with the weather, but he is merely describing 
methodology here.  Take advantage of the historical tradition of offering exposure to ONE year of negative events.  In other words, double the price based on a rare event.

3.  Invest the premium from all those options/polices into the global financial markets.  Then hope (pray?) that another 100-year rare negative event does not occur.  

In other words, short the rare 100-year event, go long the global finance markets, which have a 70% liklihood of increasing year on year.  This is good risk taking.


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