The Conflicted Warren Buffett

From Berkshire’s Chairman’s Letter circa 1996:

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses “How to Value a Business” and “How to Think About Market Prices.”

Once you follow that bit of wisdom, you can start in on the derivatives racket too. Warren Buffett is one fantastic success story, but he is also a manipulative talking head with words flowing that don’t match his actions.

3 thoughts on “The Conflicted Warren Buffett

  1. Yes, but. There is a subtle line between derivatives and insurance, the primary business of Berkshire Hathaway. As an occasional seller of cash covered puts (and this is essentially what Buffett did), I can tell you that it is the high-probability and conservative side of option activity, indicating willingness to own the underlying asset at a particular lower price. Buffett benefited from the need of other insurance companies to lay off risk on their portfolios for certain future dates. This is what successful put sellers do, but it is also what insurers and reinsurers do. Just because you see danger in jazzy forms of derivatives there is no reason to be an ignoramus. People who don’t get what Buffett did are basically knuckleheads.

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