Banking Flashcards
municipal bonds (fancy word for loan)
-PR- gets around federal state and local taxes** so municipal bonds have lower yield than corporate bonds
preciously bc of tax advatange, if bond was taxed then it would be X
bond and debt are the same thing= if I go to a bank and I say hey JP morgan please give me a loan of 10 million they will charge
me an interst rate, I make them payments along the way and then I give them their payment back
if I am IBM I want to borrow 1 billion 1 bank will not give me
If I owe the bank 1 million my problem f I owe the bank 10 billion that is the bank’s problem so tehy wull never lend huge sums of money to one entity because then you are exposed to more risk you are nto diversified what if hte entity defaults
- someone culd not be good for hte money, so if a company needs to borrow a huge amoutn of money, they can go to the banks in general, and get together and say IBM wants to borrow 10 billion dollars goldman is willing to do half a billion, JP morgan is willing to do half a billion
but if even bigger amount than IBM can go to the market….
but if even bigger amount than IBM can go to the market….
everyone can chop up a loan and pitch in
bonds are a way to chop up a loan and get a lot of money, emcahisms are exactly the same as a loan from the bank, like microloans from 100 thousand different banks
if actually trading on sovergin debt or bonds…….
if actually trading on sovergin debt or bonds
1. if a soverigen nation says they will not pay you what will they do about it, costa rica and argentina says fuck you
I will not pay you
2. if you feel great about Argetina at hte time, fully worth what payback amoutn would be then lets say 2 years later and argetina
shits the bed and screws up and hte market thinks we can’t get our money back, then we short the bond, and like a stock, 5 years ago the
security was worth 100 bucks things were looking good, but then 2 years later stuff is looking a lot less good and it trades down to 50, I
can go and buy that for 50 bucks in the hope that I get payback
3. prices of debt and bonds mve around just like stocks, so for active debt investors not just liek sign me up set it and forget it, actively
trade it, not to be too topical puerto rico bonds a lot of interesting features for bonds issued for PR, triple tax advantage, municipial bonds
don’t have to pay X tax, for ex if I invest in NYC debt and NY resident, I am except from federal tax but if in state resident I am except from city and state tax, but then I decide to say hey detroit school district bonds and I want to buy that as an NY state resident
municipals are tax free at federal level sometimes free at state level
4. federal bonds don’t have to pay state tax, triple tax break PR for common wealths and territories, but PR given tis economic relationship
with US and mainland US and amoutn of money goes back btw two entities
housing market 2008
banks make loans to people
think about one indiviudal mortgage that a bank makes, small community bank they make 1 mortgage, this is what finance ppl love to do anytime there is a series of cash flows or pattern of cash flows we can make money off of that by throwing into a bigger instrument called a mortgage backed security
so if we have all these individual mortgages overhere from different parts of country, credit levels, etc right for if we pool a bunch of stuff together I will get a benefit of diversifitication, benefit was that it has never been the case since the great depression that housing values across the country went down at the same time** bc if one of hte mortgages super multimillion dollar home in bel air vs warehouse space in BK those two things can’t be correlated, BUT THEY ARE
if you are a soybean farmer 80% of your worth is in 80% in price power of soy bean like 20% is water or agriculture
but when shit hits the fan everythign all goes to 1
everyone is selling it at the same time and it moves together, so if actually being thoughtful about correlation so when ppl run for the door at the same time everything goes down
so they all go to one and everything runs off a cliff
mortgage 2008 issue 2
not a new thing existed since 80s, second clinton term
no one thought home prices could all go down at the same time and same level of pain but back to this Michael Burry
a bunch of banks make a bunch of loans aka mortgages to home buyers
-then IB say i will take these mortgages and diversify them across whatever, throw them into a new pot called special purpose vehicle so this new box will get stuff from new monthly mortgage payments, money coming in from individual checks from individual borrows
so pretend this is revenue for them compnay that has revenue coming in, just like any other company it can issue bonds, hey guys and market we want to use these mortgages we have and it is functioning as the colatteral and security to issue bonds to other ppl
so the mortgage holders pay their mortgages into bucket of little compoany and then this little company forwards on these payments to investors who bought these bonds, way to connect individual mortgage payments to investors at the end of the spectrum
mortgage issue 2008 3
call option=
if I can buy or sell a normal thing, bodn stock whatever, I can also buy or sell options related to that thing
options are a right to buy at a certain price within a certian period of time** the details are nto as important, but ton of leverage built in so you had ppl buying the option to clal these mortgage bonds
so if somethign goes wrong if you want to buy insurance on these bonds incase they default just liek health insurance, if you want to pay for it we will promise to pay you something if somethign goes wrong that is when thi
AIG wrote all these insurances so when ti went belly up they went bankrupt, then separate derivatives called CDS credit default swaps
credit defeault swaps are a way for you to actively bet some of these bonds will go ot zero because they will default, or I want to protect myself that these bonds go to zero these are the insurance policies we were talking about
but then AIG went out of business and forced into insovlency
CDS= credit default swaps
AIG wrote all these insurances so when ti went belly up they went bankrupt, then separate derivatives called CDS credit default swaps
credit defeault swaps are a way for you to actively bet some of these bonds will go ot zero because they will default, or I want to protect myself that these bonds go to zero these are the insurance policies we were talking about
Michael Burry, Steve Isnen (steve Carrell), Paulson…
they placed a bet hte housing market will go to shit
like buying life insurance, on someone dying
he bought insurance on sick banks and bought insurance on the sick bonds that went into it, into instruments taht made up more complex things* he did it at the level of these loans look like they will go bad, these mortgages look bad so lets buy insurance on those first then he did a second level
oh holy shit goldman, huge banks had exposure to these risks
so he had to pay premium along the way and if it pays off you make bank*** last good trade jim paulson made
life insurance on ppl…..
ike buying life insurance, on someone dying, a lot of ppl take out insurance on top performers if Patrick gets hit by a bus they get paid common business
csuite ppl almost always part of it, if I have a rockstar lawyer what if he gets hit by a bus and he brings in billions of revenue for a year, I want to amke sure from a management perspective his practice doesn’t go to zero overnight. if he gets hit by a buss then I have 100 million so it gives me some breathing room to rebuild that practice so it doesn’t hit me like a ton of bricks, here are all the boxes I want to check off they all go into one thing life insurance, key person insurance, pandemic insurance
Wimbledon most large sporting events they buy a giant weird insurance policy bc all of their revenue comes from a two week period, so wimbledon got over 100 million dollar pay out from insurnace company so they dont get a hole in balance sheet paying for it forever, cost along the way but if it actually pays off
municipal bonds from patrick notes 10.30.24
municipal bonds
-PR- gets around federal state and local taxes** so municipal bonds have lower yield than corporate bonds
preciously bc of tax advatange, if bond was taxed then it would be X
bond and debt are the same thing= if I go to a bank and I say hey JP morgan please give me a loan of 10 million they will charge
me an interst rate, I make them payments along the way and then I give them their payment back
if I am IBM I want to borrow 1 billion 1 bank will not give me(I put on brainscape)
milton friedman
Money supply causes inflation Milton friedman nominal gdp right level inflation is subdue right level of growing money supply central bamker focused on to make sure inflation doesn’t get out of control financial assets go up but also need risk of inflation and other side of it is fisical policy and right now we are running out of control covid deficiets
financial modeling present value of money
discount rate
In finance, the “opportunity cost” is called the Discount Rate, and it depends on your other,
similar investment options.
The Discount Rate matters because it lets you calculate the Present Value of an asset or
company – what its future cash flows are worth today.
We refer to this Present Value of future cash flows as the “Intrinsic Value” or “Implied Value” of
the company or asset as well.
discount rate high vs low
A higher Discount Rate means that the risk and potential returns are both higher, and a lower Discount Rate means that the risk and potential returns are both lower.
For example, if you invest mostly in the stock market, your Discount Rate will be high because the average annual return has been 10-11% for the past 100 years.
But your risk is also quite high. In a given year, the market might fall by 30% or 50%, even if the long-term average is a 10-11% annual gain.
By contrast, if you invest mostly in U.S. government bonds, your Discount
Rate will be much lower: Perhaps 2-3% in a low-interest-rate environment.
WACC
So, you need to look at the weighted average of these Discount Rates across all the asset classes or funding sources.
For companies, this “weighted average” is called the Weighted Average Cost of Capital, or WACC, and it’s one of the most important metrics for valuing companies.
You can use an analogy to your personal finances to understand WACC: What percentages of your money do you put in a checking account, savings account, bonds, and the stock market?
Your “Opportunity Cost” in each category might look like this:
wacc ex.
The two main funding options for companies are Equity and Debt.
The two main funding options for companies are Equity and Debt.
Equity means that the company will raise money by selling stock to investors. In exchange, each
investor will own a small percentage of the company.
Debt means that the company will raise money by borrowing it from lenders. The lenders do not own any portion of the business, but they receive interest payments, and they get their entire principal back in the future.
equity
Equity means that the company will raise money by selling stock to investors. In exchange, each investor will own a small percentage of the company.
And for the company, raising Equity is almost always the most expensive way to fund its operations.
debt
Debt means that the company will raise money by borrowing it from lenders. The lenders do not own any portion of the business, but they receive interest payments, and they get their entire principal back in the future.
Just as investing in bonds results in lower potential returns for you, raising Debt is also less
expensive for a company.
ex of present value calculations for korea apartment
Since the Present Value of these cash flows exceeds the apartment’s Asking Price, we should buy the apartment.
But several factors could change our decision:
1) The Apartment Sale Value Falls – If the housing market crashes and the apartment is worth only $150K at the end, this decision turns into a “No.”
2) The Apartment Stays Vacant for Some Time – If it takes too long to find tenants, we might not earn $12K in rent each year, which could also make the decision a “No.”
3) Our Opportunity Cost Changes – If we find some incredible new opportunity, this apartment might not be worth it.
4) The Asking Price Changes – If the current owner suddenly decides to ask for $250K, this would turn into a “No” decision.
The same factors could change our decision to invest in a company: Its future selling price might fall, its cash flows might decline, our opportunity cost might change, or the owner of the company might want more for it.
rule of thumb:
Asking Price < Intrinsic Value: Invest!
Asking Price > Intrinsic Value: Don’t invest!
Asking Price < Intrinsic Value: Invest!
Asking Price > Intrinsic Value: Don’t invest!
internal rate of return
In addition to comparing an investment’s Present Value and its Asking Price, you can also estimate its Potential Returns and compare them to your Opportunity Cost.
You estimate these “Potential Returns” by calculating the Internal Rate of Return (IRR), which is a type of Discount Rate.
The difference is that you solve for this Discount Rate – you don’t know it in advance.
If you have a series of cash flows and a Discount Rate, you can solve for the Present Value.
In other words, if the Asking Price < Present Value, then IRR > WACC; and if Asking Price > Present Value, IRR < WACC.
In other words, if the Asking Price < Present Value, then IRR > WACC; and if Asking Price >
Present Value, IRR < WACC.
NPV
NPV = Present Value of Cash Flows Discounted @ WACC – Asking Price
If NPV is positive, then we invest because PV of Cash Flows @ WACC > Asking Price.
You also know that the IRR is the Discount Rate at which the NPV = 0.
0 = NPV = Present Value of Cash Flows @ IRR – Asking Price
Then, using algebra:
PV of Cash Flows @ IRR = Asking Price
We can then line up both formulas as follows:
x = Present Value of Cash Flows @ WACC – Asking Price
And x > 0 since we’re assuming the NPV is positive.
0 = Present Value of Cash Flows @ IRR – Asking Price
If x > 0, PV of Cash Flows @ WACC > PV of Cash Flows @ IRR.
The Asking Price and Cash Flows are constant in both formulas, so the different Discount Rates must explain the different values.
margin
from marketing class booth winter 2025
loosely used as a synonymn for profit. sometimes in $ terms sometimes in % terms
when used in % terms there are two different approaches to calculating margins:
- margin on cost (or markup)–> (price-cost)/cost
- margin on price–> (price -cost)/price
gross margin = net sales- cost of goods sold
gross margin
net sales-cost of goods sold
contribution margin
unit’s contribution against fixed costs (revenue- variable costs)
although not correct from an accounting standpoint, sometimes used interchangeably with gross margin
net margin
an imprecise term used to indicate the profit of an item after subtracting both variable costs adn some allocation of fixed costs
multiples 1
compares a stock’s price to some fundmental number generally speaking higher multiple more expensive a stock is considered like price per pound at a butcher shop
quantity for chicken vs steak differnet but look at rpice per ln 6.0 per lb or 17.5 per lb
P/E is an example of a multiple
P/E ratio
price to earnings
easy to calculate take stock’s price / earnings per share
ex. plain bagel
net income 2 million
1 million shares outstanding trading at a price of 30 dollars
30 million/ 2 million = 15.0x multiple
historic trailing p/e ratio trailing bc using historical information represents how much an investor is willing to pay per dollar of a company’s profits
so here paying price equal to 15x our share of company’s profit, helps us understand how much we are paying for a stock
p/e ratio 2
short comings is it is backward looking many believe markets are forward looking
better to use forward P/E dividng stock’s price by how much it is expected to make next year
for ex if we expect the bagel shop to release a new bagel and net income to be 2.5 million and earnings per share is still 1 milion 30
30/2.5 million = foward P/E is 12.0 x
relying on forecasts which may not pan out but can still help value stock and how much cpmapny is paying for a companuy
multiples are a reltive measure!!!!
need to understand if level is attractive or not to do so you have to compare it to other multiples, like ocmpare it to plain bagel’s historical ratios of P/e to see how it ha changed over time
if earnings are inc but stock price fallen multiple has contracted not necesssarily a good thing
if forward earnings have fallen but price of stock has risen multiple has expanded meaning ppl are paying more for less profit, comapre p/e to stocks long term average to see if amrgin is larger or smaller than nromal, if stock’s 10 yr average P/e is 10x
if stock long term average > or < than P/E
if 10 yr averageis 15x > p/e temporarilty cheaper than normal
if pick up stock and multiple later exapnds back to long term aveage we can earn a return even if company’s earnings are flat, so if a multiple is expected to revert to its mean over time MULTIPLES ARE EXPECTED TO REVERT TO ITS MEAN OVERTIME!!!!
if 15x > 12 x so stock multipel right now at 12 is temporiarily cheaper and good to buy, earn a return if goes back to 15.0x even if earnings are flat
also always comapre the stock to other stocks in industry
if compare P/E to peer average
taking into account company’s growth rate!
growth rate
if 12x compared to peers which is 10 x then its more expensive than its peers
compared to peers it may seem expensive at 12x but if its growitng its earnings at a faster pace, teh multiple may be justified! why high growth companies like tech companies have higher multiples like 28.0x vs stocks in utilities 12x
on other side of spectrum just bc stock is trading at the other side of spectrum is trading below its average of peers or its historical average like 12 vs 14x vs 16 x for historical doesn’t mean it is a good buy! the multiple compression could be justified if company’s fundamentals have deterioriated! like if steak you buy from butcher isn’t even beef anymore so no 3 ollar steak, just bc something is cheap doesn’t mean you should buy it
a lower stock’s P/E
doesn’t mean you should buy it!!
a lower stock’s P/E may reflect a justified P/E of company, for keto diets expected to kill bagel industry or company facing regulation that will stop it from making its plain bagel adn that will hurt the future profitability of copany soeven if mutliple will cotnract, the company’s long term prospects have deterioriated! multiples are meaningless without context
without understanding of company’s core business multiples are meaningless
do not chase cheap mltiples
value trap
stock looks cheap compared to historical prices but like P/E 5.0 compared to histoircal prices of 20x but continues to fall even further bc of deterioration in firms fundementals and issues with firm
multiples 3
they are not useless they are a handy way to quickly understand a stock’s price level, but they are a rough gage of a stocks’ value at best, some even contest that the P/E multiple is icnredibly limtied bc of use of accoutning earning numbers which can be altered easily by managemnet assumptions and noncash items
they can help you make decisions but make sure decision yourself is a thorough understanding of a firm’s operations not just the stock’s multiple
“its far better to buy a wonderful company at a fair price, vs a fair company at a wodnerful price”
module 3
breaking into….
2.17.25
APIC
market value- par value
never changes when share price changes, what it was when stock was issued
treasury stock
common stock repurchases, almost always negative if exists and doesn’t chage if share price changes!
if company repurchaes shres at 10 per share and it goes up to 20 or down to 5 it doesn’t matter, all that matters is the share price at the time shares were repurchased
cash flow
cash is a current assedt but not operational 3 sections from accounting
don’t list cash bc then double counting can’t do that
call options
contract
you have to have a buyer and a seller, buyer pays something seller on day 1, and that is the right to buy a stock at a guaranteed price doesn’t exist forever
Right to buy a stock at guaranteed price at some point in the future
derivatives are a zero sum game
if I enter into a contract, any money I make you lose, the seller has an obligation to sell the stock to me at whatever price we agreed on
the guaranteed rpice we typically refer to that as a strike price or an exercise price
the buyer of the call option whenever I buy a thing I am quote on quote long, the buyer of the call option is long hte call option and the seller of the call option is short the
a put I make money if the stock goes down, then what doesit mean tobe short a put- call option, has a strike price of 100 dollars, ignore the price we pay for this contract today thnk about hey what happens in teh future or at expeiration, these things have a fixed life they are not infinite what happens at teh end of our contractral term here, from buyers perspecive
if it sat 110 right ot buy for 100
exercise option buy it for 100 or receive it for 100, but then if I am just really just interested in capturing that immediately, as soon as I exercise it, I can instantenously capture that 10 dollar difference
right vs obligation so if it stock goes to 150, in the future 10 dollar pay off once we get mroe in teh weeds with whwere this theory was created when we say pay offs we are thinking of future
profit= future pay offs then accountign for what I had to pay for the thing on day 1, now we are thinking about future payoffs
if stock goes to 150 and you can buy it at 100 you ge tto capture the 50
on the opposite side
you have the right to do the stuff you already exercised, if you dont exercise nothing happens to me as the seller
why would someone sell? have a buffer or more leway before I start losing money, Ikf I haev to sell as hte seller I wnat to sell high but I have to sell to you for 100, now I hav eto go buy it for 110 and sell it to for 100
hedging strategy
I have owned this stock for a long time
it is currently at 110 I can call it at strike price of 110 I alreayd have itnot losing money
say I buy hte thing at 90 sell at 110 then you just gained 20 conservative option strategy happy to sell higher you pay me money today
the buyer of an asset you think it iwll go up, and someone on other side willing to sell it to me doesn’t believe that, derivatvies and hedging strategies can expand into uper complexiities but someone has a different view that is what makes a market, why would I sell my bose airpods 100% time better than apple pods if I can sell them for 100 dollars bc that is a price I am happy with bc I think I am getting the value, if you buy them from ou think you are getting a deal high and low mean different things btw different ppl
value vs growth investors
value investors try to identify things its current price is less than what it is actually worth, and if all goes according to plan will it eventualy move up to what it is actually wroth, buy it on the cheap here in hope of selling it in real value much later on
growth investors buy high sell higher, still buy low sell high but not afraid to jump in and in whatever metric I want to use but I think it will get even more expensive, I think the thing is goign to move up in value but its more abotu the startign point , do I think it ssuper straight
in early days he was hard core deep value looks like a super super low quality business, such a margin for safety and margin for error I am wiling to invest. charlie munger added can find stuff under valued start looking at high quality businesses that are undervalued
short
bet value of this stock will go down, if I think enron stock is going to decline in value, I wan tto bet it goes sdown, go to broker, hey I want to short this stock, get shares or borrow shares froms oneone so I am borrowing the shares, so far I have not paid anymoney and borrowed something from someone now I go out bc they are temporarily mine even though I am borrowing them then you sell them so sel them for 100 dollars, then I get 100 dollars
my only obligations is I must return the shares back to whomever I borrowed them from, if stock price goes downf rom 100 to 50 now I cna go back and buy them for 50 and I only had to pay 50 only had to pay 50 to get back paid 100 originally, and just give shares back to the guy who I borrowed them from. in that case I shorted at 100, went down to 50 and I amde that diference of 50 dollars
when I sell the thing, I have cash in my account put into US treasury saving account, earn interest on that and interset income tht way but then also do you think my broker is doign all of thsi for free for me for just a solid
they will charge me- Overstock.com horrible buisnessmodel securities frraud, but if we are all short the same thing the only ppl that are onligated to buy at some point are short sellers that is how I close out my position if I am warren buffet buys adn sits on it forever
for short position you have to return the shares from whomever I borrowed them from, which is why teh roll of short sellers gets miscronstrued they are the only ones that are forced buyers, makes marketts mroe ocmpletle
Naked short selling
illegal
means your broker lets you short the thing without borrowing the thing first, which seems almost impossible today
hit shoert or sell and everything happens in a nano
regulation is necessarily reactive of what happens in markets, market making allegations of front running, regulatory grey area
ask for forgiveness rather than position, a lot of hte stuff is actually baseline unethical, short sellers provide liquidity
be a buyer or seller no matter what happens Ken Griffin we are talking abotu micropennies differences
smart ppl good at hiding behind broad talking points of value of the finance industry
for every dollar one side makes the other side has to pay them a value captured on one side is loss on the other side
seller has obligation to sell no matter what
if Ibuy anything hte most I can lose is what my initial investment is
when I sell things whether I am shorting stock or selling short stock, selling options I get a ncie little chunk of money on day one, but if shit goes sideasy I can lose 100x that
tips
treasury inflation protected securities
I buy bond for whatever price, tips are deisgned to protect you from inflation I am giving you money and I am willing to accept a fixed amount of csh fo 30 yrs, crucial ting which makes inflaiton for regular bond investors, Iam still getting the same payment
every bond
contract has at least 5 components
the borrower
the price
the date of maturity
the value of maturity
coupon rate
terms of the bond
call options if 75
call options part 2
what is a moat
think Coke has a moat bc of a few different reasons, brand been around forever, Kleenex things synonomous with product, advantages of scale, so say I Patrick connelley wanted to start Patrick connelley beverage company how much money will it take it take me ot build out the scale and infraastrucutre pepsi and coke have my god that is a shit ton of moey, compeititive advantage
Also coke is so big that the folks it buys glass and sugar from so big they get huge volume discounts they get to be bte bully like walmart
walmart can be like here are the terms and they are really attractive for walmart and really horribel for the party if you want to sell your shit in our stores here are the terms, they also will only pay you when they feel like it, they will pay you when they feel like payign you
advantages of scale is you get to be a bully, walamrt is maximizing their value, and unilever doing the best they could but you get to push ppl around and if you are small you have no leverage
EBIT better than EBITDA
EBIT is mney I paid in the past that I have to account for movign forward there is no dna fairy that magically takes the DNA away or magically pays the D and A for us, we have to pay it bc depreciation and amorization is a real thing, he tends to focus on EBIT
right now warren holding cash
markets have gone up a lot, taken some money off the table, and that is even more attractive bc then he can put it more into Treasury bills and short term government bonds yielding 4% risk free
hes been holding a otof cash as interest rates inc, he doesn’t see a lot of opportunities right now because valuations are so high bc over the past two yrs which is icnredibly rare 20+% per year in 2023 and 2024 rarely rarely happens to have gaisn that crazy and a lot of it is being led by these high growth AI tech firms and ppl super starry eyed about the future so happy to buy high valuations of nvidia –> nvidia is 56 so p/e we are willign to pay 56 times that just to own your stock, another way to think about that is if nvidia does the earnings we think they will do it woudl take 56 years for me to get my money back so I am willing to pay for every 1 dollar of earnings they have I am willing to pay 56 bucks if you think it will grow even more
value investing mindset
vs growth investors
buy low or buy super cheap and take a risk but with a margin of safety but look this thing is crazy cheap, low probability this will go down more
buy lwo sell high
growth= willing to buy high and sell higher**
value guys look to understand downside risk bc if you manage the downside then you cans leep at night dont need to worry about the upside, as oppoosed to buying nvidia at some crazy evaluation and praying it doesn’t crash
warren buffet doesnt like PE bc…..
why charlie was so usefull to him..
there is a huge huge amount of manipulation in accounting to manipulate earnings, including things liek cost recognition, revenue recognition all this other stuff sohe likes to look higher up, if he will look at something on the incoem statement he will look at something on the income statement how profitable is each unit I sell adn each profit I sell then look at EBIT salaries SGA all that other stuff, and he does as many times he said Private equity is garbage he thinks EBITDA is worst
his letters give you his thought profit before warren buffet became warren buffet, his analytical thought process hasnt changed that much the main difference is that he now can only look at stuff that can now move hte needle
what charlie did= before warren was looking at super super lwo valuation companies garbage investing companies that was his idea and what he did really really well, hey everyone else is saying this company is super garbage town but I see a path to a turn aroundand even if I am around I will buy the garbage company but I am buying it on the cheap that if things go wrong I can sleep at night, once charlie came along who is much more quantiatively smart he was able to actually intellectual horsepower on granual level had been together forever, look warren you dont have to just look at garbage companies you can look at high value companies undervalued on a regular basis, not going to go look at high priced but high value companies where we can make an investment in veyr high high value companies that have a huge area and ability to grow like Sees candies is one of their first joint investments, its a monopology undervalued sure its a boring business, sugar high cash flow
they care abotu cash flow as their main metric
warren buffet and charlie 2
worst investment ever investment banking hard business to do well in, savier tried to solomon brothers commerical banking is a lot more predictable, but still risky so much leverage behind it, financail crisis 08 09 he dumped 5 billion but relative to berkshire balance sheet 2% gave goldman 5 billion but attached these crazy terms to it, when berkshire got to be big enough this is how he made a 5 billion investment in goldman which is preferred stock hybrid btw debt and actual stock so it lives in the middle there, you get a huge dividend nad paid before hte common stock holders
so his deal with Goldman all the stars were perfectly aligned new york and fed telling all banks you have to raise money you are scaring the shit out of everyone and raise capital however you can which had lowest risk
idea buffet thinking this is the brand, this is the brand for investment banking looked deeply into the balance sheet ok thi sis hte lowest risk I can take I feel good about their ability to come out of it, the government is not exactly forcing but basically forcing all the banks to take money so I will give them 5 billion and got 5-6% dividend which is preferred paid before other stuff
right nwo he is takign the cash and putting it in the bank and earning 4.5%
risk adjusted returns he could have kept his money in cocola wells fargo whatever the stock portfolio is, I could keep it there but the market has risk OR I can take it and put it in something risk free government bonds and get a guaranteed risk free 4% on it
berkshire hawthway at its core is an insurance company and writing a bunch o finsurance policies, receiving a shit ton of income as an operating
business like a healthnsurance company getting premiums in the door get those adn invest them and hopefully earn a greater return versus what they think they have to pay out or what they think they will pay out
warrents= long term options
long term options if things got a lot better had the option to buy the common stock and profit from that as well
he is the fire truck
if stock is at 150 he ha sthe right to buy it at 50 and he gets the 100 dollars of profit
warren’s strategy=
is this company willing to do well in teh future then think abotu price, if company is bad bail, if company is good and cheap perfect , if company is good and overpriced not with it, if company is good/meh but cheap
inflation with bonds
math works inflation goes higher investors want a higher premium real rate above inflation so bonds sell off so yields go up inverse relations yield and the price of the bond the negative mathematical correlation
- tenure has a duration 7 based on coupon is yield goes up 10 bases points bond price goes down 7% duration x change in interest= tip bond market has rallied 50 basis points times duration of, 10 yr bond has gone up in value over past 2 weeks last month there was 100 billion trade deficit annual trade is because companies were buying big expensive assets before tariffs went in 25 billion dollars means that they pre ordered
- 1% earnings come down, dynamic historic if interest rates fall a lot supports equity market but if ultimately hat drives equity prices is earnings and it looks like trump is getting companies to earn earnings grow much lower than I thought so stock market sits and turns
moat
is what you have defensible
