Daily Investment Tips

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