Chapter 19 16 crashes

I have never seen anyone who can predict the market. — Warren.Buffett Berkshire.Hathaway 1987 Annual Report In the mid-1980s, Berkshire's insurance business was booming.It has numerous property insurance companies and accident risk insurance companies, the most important of which is the National Indemnity Company in Omaha.There are offices in New York and elsewhere, earning Buffett huge profits for him to reinvest.The profits are "handy," as he puts it, paid out in cash and not necessarily subject to future claims.Buffett is familiar with the calculation of the transition between the two.He racked his brains to come up with everything he could cover: horse races, plane crashes, even nuclear war.Buffett and Carlo at a Graham gathering of 25 people.Loomis made a bet that at least two of them had the same birthday, and Carlo was surprised to find that he was right.The explanation is simple and amazing, because the probability is 60% from a mathematical point of view. The insurance industry actually uses probability to calculate some life experiences.Jack, his insurance director.Byrne will never forget meeting Buffett for the first time at a college club in Washington.He was carrying 3 dice.The color of the above is not the same as ordinary ones.Buffett suggested that Byrne would pick a dice at random, and he would take one of the remaining two.He was sure that if he had only tossed 20 times, he would have won. "I pulled out my Sharpie calculator," Byrne recalls, "because I didn't want to make a fool of myself at something I was good at."

I took a dice after calculating the odds and he won 14 times.He said, "Still playing? Bet on a lunch." This time I picked his dice and he won 16 times.I took out the Sharpe again and Buffett sat there grinning like he had eaten shit. Because these dice restrain each other.As long as you pick the right dice and roll them enough times, you can't lose.The same goes for insurance: as long as you figure out the probability of a hurricane or a three-vehicle collision and set your price accordingly, you can't lose like this kind of dice. Buffett cares more about the insurance industry than anything else.He knows that the development of insurance is unimaginable in the plan; while the development of other industries will always be accompanied by setbacks of one kind or another. In the 1970s, Berkshire was so devastated by auto insurance scams in Florida and wage hikes in California that it closed subsidiaries in Texas, Minnesota and Iowa.The increase in the huge compensation for casualty accidents has also made its life more and more difficult.When Buffett met with the managers of the National Indemnity Corporation, the only thing he said was, "Let's talk about the bad news." But no matter how hard they tried, the insurers always estimated their losses too optimistically.

In 1982, Buffett admitted his failure in this business. He hired Mike, a 36-year-old former McKinsey consultant who had worked at Berkshire for several years.Goldberg came to manage the insurance industry. Goldberg had not worked under Buffett for a long time. His office was next door to Buffett in Kewitt Square.If anyone can make a name for themselves in this altruistic field, it's Goldberg.He said that what Buffett wanted was a "selfless person," and he fit the bill. He was a thin, warm-hearted New Yorker who often reminded one of Woody.Allen.A colleague said that no one would be surprised if Goldberg had an IQ of 180.He is an outstanding graduate of the Bronx Science High School, and his talent has been overwhelmed by others.Buffett believes that his value is that he is more sensitive to risk than he is.Goldberg, who cared about nothing but work, had a battered car and once hung up his coat.His salary at the time was $2 million, and he and his wife, who had not yet had children, lived in a two-family house not far from Buffett's home.But he and Buffett don't get along very often.

Their relationship has always been good, and Buffett often comes to him to talk about some math problems, (Buffett always goes to his office, so Buffett can leave at any time.) Goldberg also occasionally brought some policies to ask his approval.But Buffett made it clear that he didn't want to answer many questions, he just pointed out a direction. Besides insurance, Berkshire's favorite business is "reinsurance."It's actually a big sale.Rather than committing thousands of policies to families and drivers, reinsurance buys policies from other insurers and shares some of their risk.This is a typical "long tail" business, because there is no telling when someone will claim.This allows the reinsurer to invest its premiums in reserves for a long period of time and not know what its profits or losses are until the last moment. It is not surprising that many reinsurers are overly optimistic.Buffett puts it succinctly:

Basically, you can receive good news reporting a certain amount of profit early in the morning every day, and you can hardly hear any loss.It feels like the joy of naive people getting a credit card for the first time. Competition is always there.Buffett believes that increasing the amount of insurance is different from general commodities. It only needs the signature of the insurer.Therefore, when insurance premiums rise, many new insurance companies will join.This often triggers periodic price cuts. This was the case for the first 5 years of the 80's, insurance premiums were never high enough.But Buffett's response to this recession has been different.

He likes to associate the business with playing cards so that it is much more visible when considering the actual payment.Every two years he is with Tom.Murphy, Charlie.Munger and some other friends went to play golf or bridge in Crystal Beach, California.They often gamble on something. In the early 1980s, Jack, the chairman of GEICO, was one year old.Bourne has a new trick.He said he would lose $10,000 if someone had a hole-in-one that weekend, or $11.Everyone is eager to try, only Buffett calculated calmly, saying that $11 is too high for this possibility.Friends couldn't believe the billionaire could be so stingy and they all laughed at him.Buffett laughed too, saying he counted his $11 bet as seriously as he counted his $11 million bet.His wallet is always locked tightly.

The same goes for him in insurance.When other companies lowered insurance premiums in order to maintain market share, Buffett realized that this was actually a chance.He and Goldberg were unwilling to do so. From 1980 to 1984, they would rather have their revenue drop from $185 million to $134 million.If a certain industry is no longer profitable, Buffett will quit this industry.He wrote in 1982 that one day the insurance companies would get out of the loss and he would just have to wait. It's natural to ask why other insurance companies don't take Buffett's approach.Because their shareholders and managers have been educated in "steady" growth, giving up is not in keeping with that ethos.

Berkshire's insurance company has no such pressure, (he has no "insurance culture".) Constantine, the manager of the New York branch.Ewodanon said he clearly has "Buffett's checkbook" in mind when he sets policy, which avoids taking chances. By 1985, the insurance market had indeed changed.The industry has suffered enormously; pockets are running out, and many companies have had to scale back coverage.Underwriting capacity, in Buffett's words, is "a judgment rather than a specific factor." In 1985, many companies' "judgments" and funds plummeted, so insurance benefits skyrocketed again.

Buffett can now reap double the benefits of previous conservative moves.Large commodity customers realize that the promises of a poor insurance company have no insurance at all.What they want is service quality; and Berkshire's capital is 6 times the average of other companies, and its balance sheet is also the best in the country.So when Berkshire offered an attractive price, its customers flocked. In the middle of 1985, Buffett made an astonishing advertisement, willing to cover any risk for big customers who had difficulty finding an insurer with an insurance premium of more than 1 million.This may be misinterpreted as the parties must declare their own prices.If Buffett or Goldberg didn't think a policy made sense, they would turn it down without giving it a second chance.The move earned Berkshire more than $100 million.

This situation where the strong get stronger is especially evident in reinsurance.Insurers of the past are losing money and are struggling to survive.The losses of reinsurance companies are not small, and few companies can take out insurance again, let alone anyone willing to do so.They suffered losses at low prices, and now they dare not make up for them at any price.Buffett likens them to Mark.Twain's cat: "After sitting on a hot stove, I dare not sit on it again. Even if the stove is cold." Berkshire is now able to plan some big projects, thanks to its deep pockets and Buffett's "judgment."As long as the opportunity and price are right, he is not afraid to take the risk of loss, even if it is 10 million fire or earthquake risk.In his 1985 report, he made a generous statement: "The situation is different now. We have insurance coverage that others do not have." In 1986, Berkshire's insurance income reached 1 billion US dollars, seven times that of the previous two years.This gives it a provision of 800 million which can be reinvested; 1 billion the following year.

By 1987, Berkshire had plenty of money.But people don't know how Buffett will use the money.He "would rather buy a good stock than a good plane," Buffett said in self-mocking.Too bad he couldn't find cheap stocks.That was the heyday of the bull market.By the time Berkshire holds its annual meeting in the spring, Dow.The Jones Index is an eye-opening 2,258, (Berkshire shares are at $3,450.) Buffett has quietly sold most of his stocks, keeping only three "permanent" stocks: Cosmopolitan, GEICO and "Washington post".But he's having trouble finding places to reinvest. Buffett doesn't believe in forecasting, he reminds shareholders, to be in charge.Jones only has 400 time points.Graham was still falling.But Buffett's pessimism cannot be concealed.He once answered a question and said that he would not be surprised if the stock price in the market (which was unsteadily maintaining 20 times profits at the time) fell by 50%.Share prices have recently risen more than the 12-13 percent coupons on bonds issued by some profitable companies.Buffett thinks the stock market is a dangerous place right now. A shareholder with a good memory asked him if the current atmosphere was very similar to 1969, when Buffett Partners was just formed.Buffett recalled: "There was no chance at that time. I quit the market and returned all the money to my partners." But he can't quit now, and his members—the insurance company, Mrs. B, etc. are still making money for him.He needs a place to invest. During the spring and summer of that year, the stock market stabilized, Dao said.The Jones Index reached 2500, and by August it was 2700. Many made a fortune from the bull market; but those who stood on the sidelines, like Buffett, lost the greatest opportunity of the century.While Berkshire stock hit another record of $4,270, that hardly mattered anymore. He put money in local government bonds in 1969 and now has no choice.Soon he received John, the president of Salomon Brothers.Godfrey's phone call. Godfrey and Buffett have grown closer since helping GEICO a decade ago. Godfreud often has a feeling of being overwhelmed by the heights. He often calls Buffett for advice; Buffett admires Godfreud as a superior investment banker.Despite his reputation for sarcasm, Goethe was conservative in his approach to business.He had refused to allow Solomon to buy a controlling stake to make a spread or to buy large bonds, even though that would have been lucrative.in Charlie.In Munger's eyes, Godfrey embodies all the noble qualities of the Solomon culture, especially the spirit of daring to take investment risks.He has a sublime air that is rare among managers of this new generation. Over the summer, Buffett mentioned that he would be interested if Salomon's stock went any lower.Although its stock price has fallen by 1/3, it is not the level that Buffett wants.It's a pity its business is in trouble bother. Solomon's largest shareholder, Minerals and Resources Corporation (also known as Minoco), was clamoring restlessly.Mino can be controlled by Hardy of South Africa.Oppenheimer & Co.It hired an investment banker, Felix.Ruhatton, state that Minoc is in a hurry to sell.Even though 14% of Salomon's stock was in other people's hands, Godfrey let him go with the flow-a deadly habit.It was mid-September when he learned that Ruhatton had found a buyer for Ronald.Belloman's Lavron couldn't help being dumbfounded. Godfrod capitulated to his investment bankers, who agreed to let Salomon go into receivership.He never imagined that he would end up in this situation.He was joking around a year ago at a roundtable with Boone.Biggens, merger attorney Joe.Fred, president of Fran and Jacksay.Joseph, Rudolph.Giroulani, arbitrageur James.Sir Goldsmith and Buffett. Lonis.Kayton brings up “Harry”—the quintessential traditional CEO—who works to build long-term value but is suddenly threatened by arbitrageurs. Goldsmith: Let's stop spending too much time with Harry. Moderator: (in Harry's manner) What do you mean?My company has grown step by step from my backyard. Goldilocks: You did a good job in those days.But I'm sorry, this is life, and the board of directors has the right to fire him. Moderator: Is this fair? Goldstein: It's not a question of fairness or unfairness.You can't turn back time.Whether it's self-support after improved management or being taken over...Harry is a thing of the past. Now when Godfrey looked in the mirror, "Harry" was looking at him! Godfrey agrees to meet Belloman.The latter assured him that his "motives were friendly" and that he hoped that Gorbachev would stay.But it said he wanted two seats on the board and hinted at buying 25 percent of the stock.Godfrey looked calm. Solomon's supporters soon informed him that Bellowman's representative was Bruce.Warsaw was too, and worried that "Bruce" would soon be in power if Belloman gained control.Beroman dismissed this, saying he would not find work for Mrs. Warsha out of his own pocket.In an interview he stated again that people misunderstood his motives.But he himself was vague, saying only that Solomon's business interested him. But no matter what, Godfrey and Solomon's people still couldn't trust him. "They thought he was like a savage from Attila Corporation," Ruhatton said.Bellowman was in the midst of launching a second attack on Gillette and making a lot of money from it.Martin, Solomon's actuary."There's no way people will work for Bellowman, and we never will," Leibowitz said. what a pity!This high level of solidarity came too late.Minoko is now willing to sell as long as someone buys it. Solomon couldn't afford it himself, and Beloman was going to buy it at $38 per share (the market price was a little over $30), totaling about 700 million yuan.It was September 21st, a Monday morning.Ruhatton thinks Salomon can only try to find another buyer before the weekend.So Godfrey called Omaha. A day or two later in New York, Buffett arranged with Godfrey and Gillard, Solomon's treasurer.Rosenfeld's meeting at Godfreud's adviser, attorney Marty.Lipton's office.Buffett arrived dressed casually with a newspaper under his arm.His blue and white bubble sand suit was ripped at the hem.Seeing this tattered appearance, Rosenfeld gasped: Is this Solomon's savior? Both Buffett and Godfrey personally tested each other's intentions, and Rosenfeld joined in an hour and a half later.Buffett began to ask him about Salomon's prospects, including how high the stock could rise in five years flat.They agreed that the number 65 was more likely.Buffett believes that buying common stocks is too risky, and as long as Berkshire can achieve 15% of annual after-tax income, he would prefer to invest in a senior convertible bond.As the conversation continued, his thoughts became more and more clear. Half of the convertible bonds are created because of Wall Street.It has the properties of a bond.A fixed coupon and a mortgage or guarantee from the debtor.At the same time, the holder can also exchange it for ordinary shares.It is aptly called a bond with a lottery.Holders have less investment risk and a chance to make a killing -- though not as profitable as common stock. Buffett insisted on a 9% coupon and two board seats—one for himself and one for Munger.Solomon's senior managers had a heated discussion about it. They all thought Buffett was too good. "It felt like the price was low ($38) and the dividend was big. He had both," said William, head of Solomon's Chicago office.McIntosh recalled.Berkshire's annual dividend of $63 million is largely tax-free like similar income at other companies.But on the other hand, Buffett's money can buy Solomon from Minoko and avoid the threat from Belloman.In the minds of Solomon's leaders, there was no choice between Buffett and Beloman. Godfrod and Belloman met again on Saturday night.They had a drink at the elegant Atney Plaza Hotel in New York's upper east corner.This time Godfrey told the other party politely and bluntly that he was not welcome as an investor.Two days later, a frustrated Beloman said he would accept the same terms as Buffett, but with less profit, threatening to buy a controlling stake in Solomon on the open market if rejected.Godfrey again declined. Goeshi then told his directors to either make Buffett the largest shareholder or find another president.He argued that Buffett would definitely help him run the company.There is one shareholder, Morris.Greenberg was staunchly opposed, but the board passed the decision anyway.The only reason for this expensive deal was an uncertain premise—that Solomon would be better off in Buffett's hands than in Beloman's. When the news was made public at the end of September, the entire Wall Street was stunned. "Wall Street Journal" commented: This kind of thing could have happened to anyone-except one person.Buffett put $700 million into a firm of traders -- his biggest gamble yet.He had great respect for Godfrey.Soon he said: "Charlie and I both like John, admire him, and trust him." And that guarantee looks pretty safe.The president of Bear Stearns, smart-ass Ake.Greenberg thinks Buffett "made a great deal for Berkshire shareholders."If Godfrod hands the market away, that's his problem. Buffett is still a little impulsive. Alan of Forbes.Sloan noted that Buffett's financing enabled Solomon to pay Minoco.Buffett admirers are a bit disappointed that he's now in the same league as Wall Street.A year ago he wrote contemptuously that if a business school graduate asked him how to get rich quick, he would put his hand to his nose and point to Wall Street.Now even the most loyal Carlo.Loomis lamented in "Happiness" magazine: The most fascinating thing about Buffett investing in Salomon is that he sleeps with Wall Street, which he has always mocked for its greed in the past. The facts quickly proved that Buffett was dead wrong.Two weeks later, Solomon revealed that he would lay off 800 employees and close two departments, which would cost more than $67 million.Godfrey seemed out of control.This has caused widespread anxiety in the stock and bond markets. The bull market has been going on for 5 years.Although interest rates had been rising for most of 1987, (which would have affected the intrinsic value of the business.) the stock market remained unmoved.By August, the share price reached its historical The most volatile level - 22 times profit. Just as a lunatic has an opinion, a bull market has its own theory to explain it. In 1987 only additional "liquid assets" could keep prices under control.This idiot theory says: Some unknown person's cash (liquid assets) is what saved the situation.Japan's stock was 60 times the profit at that time, which is said to have reached its peak.No matter how absurd the domestic stock market is, American shareholders are safer because Japan is even more absurd.Of course, this explanation cannot prevent the sudden stop of price stabilization.A bull market is like falling in love, it only comes once, and there is no precedent for yours this time. Binkley, senior deputy manager of Wellington Management.Shoz is a representative of people who hold this point of view.He is an MBA from Harvard Business School and has three children.Now he has his finger on the pulse of Wall Street.He admits that the stock market is rich right now, and the heart is still beating strong: Our market attracts many foreign investors because it does not have their domestic market fees.Perhaps it will continue to rise, erratically as it is. No one does not say that the price is high, but the bull market still attracts many people. "Yesterday's size" isn't working, says BusinessWeek.Buffett believes that money dealers have completely given up on the evaluation of stocks, and there are no standards.“To them, stocks are just toys, like patented thimbles and irons,” he said. With the help of computers, fund managers bought buckets of stocks in the market's "basket"—a few million for GM, a few million for AT&T, some for Westinghouse.At the same time, stock index futures also appeared in the commodity trading place in Chicago.This is another new type of futures contract after pork and livestock futures.It allows one to speculate on the movement of the entire stock market.For investors like Graham and Dodd, the value of a stock is of course derived from the business of the corresponding company; but this kind of new investor is buying the entire market, and they don't even know which stocks they own, let alone risk analysis up. On Wall Street (if not Omaha), "asset reallocation" is in full swing.For the first time, portfolio managers decide how much to invest in "a class of" stocks rather than "a certain class of stocks."The total amount invested has fluctuated, often resulting in a situation where it all changes hands.As a result, many managers have had to rely on computer models or let the computers run the buy and sell entirely. In September 1987, Situation Advisers warned that over-reliance on technical experts could lead to "perceived misconceptions." Unfortunately, few people noticed this.Fund managers' "securities insurance" strategy is said to be very safe.According to this strategy, they stipulate in advance that stock futures will be automatically sold when the market price falls, and the greater the decline, the more they will sell.The theory is that it is much easier to sell futures than stocks.Securities dealers can reduce losses before the sharp drop by selling quickly. V. Kent, Investment Advisor, First Bank Exchange, Minneapolis.When someone tries to sell, Green says, "some of your stocks are in a very illiquid position"—meaning no one wants to buy it. But Green still slept soundly, taking the Chicago shortcut if necessary. "The liquidity of futures," he said, "is now four times that of stocks." The reason Green doesn't care is that now he doesn't have to sell futures; he only sells with others when the market falls.Take investment banker Nicholas. The White House Research Group headed by F. Brady indicated that when this moment comes, there will be $60 billion to $90 billion in futures operating like Green. In retrospect, October is remembered not for the sudden change that occurred then, but for what was strongly predicted about it.Pessimism was everywhere at the time.Press release Charles.Almen said it was a "1929-like crash."The bears think the price is too high, and so do the bulls, but they all want to cash in at the end.When reaching the highest point of 2722.4 points from January 1 to August, road.Jones has grown by a staggering 44%. Everyone is blown away.morgan.Stanley's investment strategist -- and one of Wall Street's most visible beacons -- Byron.Wayne is ready to give up the rules to do things.He said in August that even bad news couldn't stop stock prices from rising. …there is a mysterious force driving the market… Maybe the link between reality and stock prices is not as strong as we are taught in business school. God!A week later, reality was lifted.Signs of inflation began to appear, the trade deficit remained high, and the exchange rate of the US dollar fell sharply.In order to prevent inflation and ensure a strong dollar, the Federal Reserve announced on Labor Day that it would raise the discount rate, which is the interest rate that people care about most when the Fed provides loans.Affected by it, the bond market plummeted, and the stock market also fell 38 points in one day. Yields on long-dated bonds rose to nearly 10 percent by early October, up from 7.4 percent in March. On Oct. 6, Dow.Jones fell 91.55 points, its worst day ever.The market has become blurred, the development of the situation is not under human control, and historic changes may occur at any time.In the short term, the situation is dire. Around October 12, Buffett sold at least a batch of dividend-paying stocks.He sold all but three of his perpetual shares."The order is clear: sell everything," said his aide. Buffett is not predicting.He only obeyed two precious rules: one, never lose; two, never forget the first; Munger said, "Warren would never ask to sell." The 1929 newspaper.In the following week interest rates rose to 10%. Japanese stocks continued to rise, but no one on Wall Street cared about Japan anymore.On Black Friday, October 16th, Road.Jones fell 108 points. Washington was anxious.Whenever the market fell, the bureaucrats looked to random culprits—speculators, people like the big Swiss bankers who lent to foreign governments, you name it.Some blamed "29-year-old technologists" for the market's decline.The Treasury Secretary graciously said on television over the weekend that he did not think it was possible for the Fed to tighten any further, but it was too late. On Monday, October 19, the market was packed with sale tables. 30 ways.Eleven of the Jones Average industrial stocks failed to open an hour after trading began.At noon, the securities and insurance sales process started automatically.What the futures market does is a free fall, which of course also triggers a decline in stocks.When the market closes, where the sales close is very important.There are too few doors to guarantee that everyone can squeeze in.Stocks that soared into the sky fell hard.By dusk, the panic finally developed into a crash. Outside the Faithful Investment Company in Boston, there was a long line of people waiting to sell their shares.The news of "hysteria" was published in the newspaper.New York's financial center was much quieter than usual.With people stuck in their offices glued to their computer screens, Black Monday became the first historical event of the modern era, so ubiquitous that it seemed to have no specific center.road.Jones fell 508 points, or 22.6 percent. Buffett's total losses amounted to $342 million.He may be one of the few people in the country who isn't keeping an eye on the collapse of the economy.Only once, he walked into Mike.Goldberg's office, calmly telling him what Berkshire should do, and then he returned to his desk. Two days later, Buffett's Graham gang gathered in Williamsburg, Virginia.Markets are still in turmoil, but they are all strangely brushing aside.No one ever left the room to look at prices, or even talk much.They visited a plantation in the crisp autumn and raved about the ornamental plants there.Windham.Robertson, a university administrator and reporter for the group, asked Buffy When asked what this collapse "means," all he could always say was, "Maybe the market has gone too high." Compared with the Black Thursday of the 1929 crash, this Black Monday is eerily hollow.It didn't cause a depression or anything.At first it was thought that the collapse would be a socio-economic milestone.Columnists hailed the end of the gambling era, gleeful at the disappearance of the heads of the bank's investment upstarts.Wall Street continues to function.In fact in 1988 bankers traded more than ever before and stocks regained most of their lost ground.The crash didn't seem to leave any trace, leaving only a zig-zagging curve on the trader's monitor. The crash didn't bring about much noticeable change.In the week before it happened, Berkshire shares sold for $4,230. On Friday the 16th, it closed at $3,890.On a crazy Monday, it dropped to $3,170.After 22 years of hard work, Berkshire has assets of nearly $5 billion.Nothing has changed in the company: Stan.Sales of Lipsch's newspaper in Buffalo remained the same; World Encyclopedias sat quietly on students' shelves.But in that week, the company lost 25 percent of its market value, and a quarter of a generation's hard work disappeared.It still suffers losses.