Although Warren Buffet is publicly known as a long term investor who is never interested in complex investments, the man invests in derivatives on the side. This is a big surprise considering he once referred to this type of investments as “weapons of mass destruction”
Warren Buffett, uses derivatives to speculate on long-term gains in stocks and the creditworthiness of corporate and municipal borrowers. The contracts tied to equity indexes, which aren’t scheduled to settle until 2018 or later.
This derivatives investments have been the cause of recent profit declines by Berkshire Hathaway. In November 2011, Berkshire Hathaway Inc. said third-quarter profit fell 24 percent as derivative bets declined in value.
This Warren Buffet Derivative Bet Could Be a Ticking Bomb
If the stock market continues to decline Buffet & Co could face a loss of $34 Billion. Warren Buffet sold the equity derivatives to undisclosed buyers for $4.9 billion. Liabilities on the so-called equity-index puts widen when four stock indexes fall from the levels they were at when Buffett made the contracts near the market peaks in 2006 and 2007. If the indexes are at zero when the agreements expire, the losses would be about $34 billion.
Warren Buffet has also invested in Credit-default swaps, in which Buffett bets on the solvency of borrowers.
written by Constantine Njeru
\\ tags: Berkshire Hathaway, Berkshire Hathaway Inc, Credit Default Swaps, Creditworthiness, Derivative Investment, Derivatives, Equity Index, Equity Indexes, Solvency, Stock Indexes, Warren Buffett, Weapons Of Mass Destruction
I was reading the latest quarterly report from Berkshire Hathaway, they just reported 40% profit decline for quarter ending June 2010.
The business remains solid but the company profits seem to be dragged down by its derivative contracts that the company signed in 2007.
The contracts are tied to equity indices. When the US stock market rises Berkshire gains but when the the stock indices slide down Berkshire looses.
In the last quarter the paper losses from this derivative contract was $1.5 billion.
In 2009 second-quarter the stock market soared & Berkshire recorded a mostly unrealized $1.5 billion gain on its derivatives in last year’s second quarter.
Warren Buffet himself correctly predicted the value of those derivatives would vary widely quarter to quarter.
How big a risk are this derivative contracts? Warren Buffet himself once referred to them as weapons of mass destruction. Only time will tell.
For a better understanding of this derivative contract read this article Berkshire misunderstood derivatives.
written by Constantine Njeru
\\ tags: Amp, Berkshire Hathaway, Company Profits, Decline, Derivative Contracts, Derivatives, Investing, Last Quarter, Paper Losses, Quarterly Report, Risk, Second Quarter, Slide Down, Stock Indices, Us Stock Market, Weapons Of Mass Destruction