Stock Market Insurance

“Michael, I found this recent story intriguing, particularly in the way it contrasts with Nassim Taleb’s strategy, with which I agree. It will be interesting to watch how this plays out. Buffet has a stellar track record, but I can’t help but wonder if he’s wandering too far afield.”
Carlos Roberts

“NEW YORK (CNNMoney.com) – Billionaire investor Warren Buffett is making a $14 billion bet on global stock markets, according to an article Tuesday. Buffett’s Berkshire Hathaway has sold clients insurance protection against a drop in four equity indices, the Financial Times reported. If the indices, three of which are outside the U.S., fall by 30 percent over the 15-20-year life of the contracts, Berkshire would incur a pre-tax loss of about $900 million. It has a maximum exposure of $14 billion, according to the report. Analysts told the paper that the purchasers of the index contracts were probably pension funds that wanted to increase their potential long-term returns by holding more equities but needed protection in case of a stock market meltdown. In a filing, Berkshire Hathaway did not disclose any more detail about the contracts, including the premiums it would receive or the level the indices must fall below before it made a pay-out, the paper said.”

Buffett often makes his money in a much different fashion than buy and hold.