Kool-Aid Tastes Good!

My post on Warren Buffett’s clear hypocrisy toward the use of derivatives brought this feedback in from one of his true believers:

Buffett hates toxic derivatives. He writes the most plain vanilla derivatives there are. Not only that he spent hundreds of millions of dollars to close down toxic derivatives when he acquired General Re, the derivatives he writes are probably less dangerous than the insurance policies Berkshire writes.

They served Kool-Aid in Jonestown…did you know? I love the phrasing he uses:

“hates toxic”
“plain vanilla”
“probably less dangerous”

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3 thoughts on “Kool-Aid Tastes Good!

  1. “HE WRITES”, and that is the entire point. AIG, Lehman, Bear et al WROTE puts, shorted puts, on various pieces of paper: corporates, mortgage pools, mortgage tranches etc… they were called credit default swaps. shorting options, unless you are covered in some way, or hedged to a large degree another way, always work until they don’t. it truly is picking up nickels in front of the steamroller. 19 out of 20 times, you get the premium over the slow roller… then one day, you don’t realize your shoe is untied (or you have mis-predicted future market moves in the complex system of guessing something 5-10 yrs out), and it gets caught in the roller – game over.

  2. Guy who wrote me that above just sent this:

    Seriously? You can’t see the difference between “index equity puts” and toxic derivatives? Is that really that hard? He spent millions to shutdown toxic derivatives. His insurance business is probably more dangerous. From your own article: Buffett, 81, 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, produced a loss of $2.09 billion in the period as the Standard & Poor’s 500 Index posted its biggest decline since 2008. Liabilities on the equity derivatives rose to $8.85 billion. Does that sound like a toxic derivatives business? Warren Buffett has a record of over 20%+ a year returns. Of course I drink the kool-aide on that one.

    Wow. Lost.

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