This is beautiful…….nice job James
“Ever since Berkshire Hathaway (BRK.A) reported earnings earlier in the month, a number of people have been abuzz about the “losses” generated from marking-to-market some of the derivatives on the books. Barron’s had a Q&A with short hedge fund manager Doug Kass (one of my favorite contrarian voices) where Kass said he was short BRK because of Buffett’s “investment-style drift,” which has led him to take large positions in derivatives instruments – which he famously derided as “financial weapons of mass destruction” in his 2002 letter to shareholders. And while I’m not sure of his positioning, Mish Shedlock echoed similar thoughts, saying that Buffett’s mark-to-market derivatives loss has given him “$1.2 billion less to invest because so far he is underwater on his short…”
I think Kass and Shedlock are taking their bearish act too far – perhaps because they are doing some unconventional style drift of their own and backing off their normally-sharp research. As Buffett notes in the section of his letter dealing with derivatives, the term “covers an extraordinarily wide range of financial contracts” and range from simple puts, calls, and futures to exotic agreements on any number of reference points, such as total return swaps. Actually reading the two-plus pages of Buffett on derivatives, it becomes clear that the concern centers on long-lived or extremely complex contracts that need to be marked-to-model, allowing for fudging profitability. Buffett isn’t talking about the simple derivatives contracts that Buffett has been increasing Berkshire’s involvement in – namely equity index puts and credit default swaps. I don’t have any explanation why so many people get this wrong, other than to assume they didn’t actually read the relevant passage.”
Read the remainder of the article here
Disclosure (“none” means no position):None
