$2 million bet on Japan

For past one month for obvious reasons Japan has been in the news. The triple whammy of an earthquake, tsunami and then the nuclear disaster at the fukushima plant has caused significant damage to Japans economy, on the order of $230 billion, according to some recent reports. Like any other major disaster, markets reacted to this bad news with a sell off. Nikkie fell by more than 6% on the first trading day in the aftermath of the earthquake.

Like many contrarian traders out there, I sense an investment opportunity here As a result, I have been on the look out for trading opportunity in Japan. In particular, I am following the iShares MSCI Japan Index fund EWJ. iShares says the following about EWJ “Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Japanese market”. Perfect! There is no better way to play the Japanese markets as a whole. Dig deeper and you will notice EWJ is significantly invested in Japanese automarket, with approx 10% of the portfolio made up of Toyota and Honda. Neways, I will talk about the specifics of EWJ some other time.

I have been following EWJ for past 15 days now. Being optimistic about the situation in Japan in the long term, I am looking at LEAPS on EWJ. This is where the I noticed something very interesting yesterday. The last trade on Jan 13 call option with strike price of $12 happened at approximately 1 pm yesterday, and the volume of the trade per information on two brokerage accounts that I looked at, was 27000. The trade was made at 0.75 c per contract, which comes to about is approx $2 million for this trade. Some one has made a $2 million bet on Japan. This is a very interesting trade especially given that on the same day the volume on EWJ cal option with strike price of $11 was zero. Some one is either extremely optimistic on Japan or this is simply a glitch in the software; remember the mini market crash of last year.

Lets see what the upside of this trade will be under different circumstances. On the extreme optimistic side, lets say EWJ goes to $13 by end of this year. That is a gain of approx 30% in eight months. Simple calculations using Black Scholes model, tells me that the option will be priced at approx $1.7 per contract, which results in gain appro $2.7 million. Being less optimistic, but still optimistic, lets say instead of this year end, EWJ goes to $13 by fall of next year. In that case, very similar calculations produce a gain of approx $675,000, which is not bad either.

Should this be a call for going long on Japan!

Berkshire Annual Report-2011

For over a year now, I am a lawful owner of a piece of Bershire, albeit a very very small one. In any case, one of the many advantages of owning Bershire, peace of mind being the biggest one in my opinion, is that you get to read the Bershire Annual report. The report also contains Buffets annual letter to his investors. As always there are some amazing insights in the letter. Below I list some that I will treasure for some time to come:

(Note: The statements below are verbatim from the report; my comments are italicized)

1. However slow the economy, or chaotic the markets, our checks will clear (peace of mind I was talking about earlier)

2. Overwhelming portion of their (Berkshire businesses) future investments will be at home

3. Money will always flow toward opportunity, and there is an abundance of that in America

4. Human potential is far from exhausted

5. We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.

6. The challenge ofcourse is the calculation of intrinsic value (on how to value the company)

7. This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value (comment on the component of intrinsic value of company that depends on its shepherd)

8. At Berkshire our time horizon is forever

9. We must anticipate society’s needs, not merely react to them (on being major part of American economy’s circulatory system)

10. Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates.

11. The third best investment I ever made was the purchase of my home….The two best investments were wedding rings

12. Our country’s social goal should not be to put families into house of their dreams but rather to put them into a house they can afford

13. …-sensitivity to –risk (which in no way should be measured by beta, the choice of too many academics)

14. I believe that equity prices will very likely increase

15. Black-Scholes produces wildly inappropriate values when applied to long-dated options

16. Our inability to pinpoint a number (value for option) doesen’t bother us: We would rather be approximately right than precisely wrong

17. You can be highly successful as an investor without the slightest ability to value an option.

18. What students should be learning is how to value a business. That is all investing is about

19. A fundamental principle of auto racing is that to finish first you have to first finish

20. As we all learned in third grade – and some relearned 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero (comment on leveraging)

21. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

22. Borrowers .. . learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, its all that is noticed