Buy and Hold? Buying Strong Businesses? Derivatives Are Weapons of Mass Destruction? The Tooth Fairy? Yellow Brick Roads? Oz?

From the wires today:

“OMAHA, Neb. (AP) — Warren Buffett’s company reported a 40 percent drop in second-quarter profit Friday because the improvement at Berkshire Hathaway Inc.’s operating companies couldn’t overcome $1.4 billion in paper losses on derivative contracts. Berkshire’s strong performances from its railroad, insurance and manufacturing businesses was overshadowed by the plummeting value of the Omaha company’s derivatives — many of which are tied to the value of four major stock markets.”

From Buffett himself in 2002:

“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

From Bloomberg recently:

“Buffett’s well known for his criticism of derivatives. Yet Berkshire in recent years has become a big player, with some $60 billion in derivatives contracts. Under any new derivatives regulation, Berkshire would be likely to have to produce collateral for new derivatives contracts it writes. This would limit the attractiveness of new derivatives deals for Buffett, who has boasted that Berkshire rarely does a deal that calls for it to produce collateral. But that’s not why Buffett has been pushing back against the financial reform bill in the Senate. Instead, Buffett says he’s concerned that the legislation would impose collateral requirements on existing contracts — which he says would be illegal. Sen. Ben Nelson, D-Neb., made the same case this week as he defected from the Democrats backing the financial reform bill. Whatever his logic, pushing back on derivatives reform has the interesting side effect of aligning Buffett, with his sterling reputation, with the widely derided Wall Street banks.”

Buy and hold? Buying strong businesses? Derivatives are weapons of mass destruction? Bailouts of many of the components of BRKA? Does anyone have the cajones to criticize Buffett? There has to be at least one emasculated weenie out there who will come on here and tell me that I can’t criticize America’s wealthiest just because he is rich. Right?

The Buffett myth is just that — a myth. If not for the fall 2008 bailouts, he would be on the senior circuit revising history along with Greenspan. Why my stark view on this lovely sunny morning in beautiful Southern California? Cause no matter how many books populate Amazon, all preaching about how you can become the next Buffett, they are all disingenuous fairy tales.

18 thoughts on “Buy and Hold? Buying Strong Businesses? Derivatives Are Weapons of Mass Destruction? The Tooth Fairy? Yellow Brick Roads? Oz?

  1. “We are hopeful that recent economic improvements will continue over the remainder of 2010 and beyond,” Berkshire said in its report.

    Honestly they are “hopeful” that the economy improves because they will need to get bailed out again if it doesn’t.

  2. Mr. Covel: Long time, no comment. It is assinine to say that Buffett is a myth. He has the wealth to prove that he and his company (s) have done something right over the years. Taking a bath on deriviatives shows that even the great Buffett can be wrong. His position in this also shows some hypocracy as over the years in his annual reports, he has preached the doctrine of the problems of deriviatives. No one has a monopoly on being right or wrong.

    I purchased the updated version of your Trend Trading book today, and must say that I am enjoying it and learning. I am in chapter 2 in which you give profiles of various traders; interesting to note that they too have had severe drawdowns.

    Thanks. John Hudson

  3. ‘Does anyone have the cajones to criticize Buffett? […] The Buffett myth is just that — a myth.’

    How do you reconcile the above with the following, which you also wrote recently?

    ‘Regardless of Buffett’s bailouts, etc. — doesn’t everyone think it is a little odd that anyone would question his ‘money’ acumen? He did after all make a few billion last I checked.’

    Jeff

  4. Michael –

    I was merely pointing out an apparent contradiction.

    I don’t understand how you can imply on July the 25th that Mr Buffett’s money acumen is beyond question, and then ask rhetorically yesterday whether anyone has the guts to criticize the aforementioned money acumen…

    Have I misunderstood you?

    Jeff

  5. “It is assinine to say that Buffett is a myth. He has the wealth to prove that he and his company (s) have done something right over the years. Taking a bath on deriviatives shows that even the great Buffett can be wrong. His position in this also shows some hypocracy as over the years in his annual reports, he has preached the doctrine of the problems of deriviatives. No one has a monopoly on being right or wrong.”

    This is some really unclear thinking.

  6. Michael –

    I’m not sure whether to be insulted or flattered that you have now twice felt the need to make irrelevant ad hominem attacks in response to my arguments… 🙂

    According to you, I’m an anti-capitalist nut and a weenie. Is there anything else you’d like to call me (despite knowing absolutely nothing about me)?

    Jeff

  7. buffett hit the 5+ standard deviation point in ’08, which nassim taleb talks about in his books. and as mike says, were it not for govt intervention, buffett and BRK would be belly up, hard as it is to swallow, that is a fact… and he would just be another footnote in financial history.

  8. Sandwah, you know I assumed he would have paid up and wriggled out of those derivative positions some how or another after fall 08/spring 09. Someone must be holding his feet to the fire…with a strong view of equities going the Japan route…which means WB might get his 5 sigma phone call again…

  9. Jeff, I noted in my post … that I expected weenies to jump in with weenie thinking. Don’t take it personal.

  10. Another “too big to fail” entity being worshiped by the masses. Those who know the real story are not impressed. Luck and connections have played a major part in keeping this house of cards standing this long.

  11. To all of you, including MIchael: Of paramount importance to Buffet’s financial success is the degradation, desecration and monumental inflation of the dollar. Absent the fraudulent counterfeiting (which includes bank credit expansions in the trillions) of the dollar, Buffett’s net worth would be about 20% of what it is.

    Cole

  12. Cole, inflation has absolutely nothing to do with it. The fact is that without his own personal “bailouts” and extensions on “margin calls”, Buffet would have lost a large portion of his fortune over the past 2-3 years and depending upon the derivative situation he still may.

  13. Warren Buffet openly admits that time to time he takes arbitrage trades when he sees opportunity. Warren openly says that the derivatives are weapons of mass destruction. Where there is mass destruction on one side there might be huge profit opportunity on the other side right? Is it possible that he got it wrong this time? Sure it is. So what is the point? What do we really know about his positions other then their estimated size?

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