Berkshire Hathaway, the conglomerate owned by billionaire Warren Buffett, said Q3 net profits fell 23.8% to $2.28 billion or $1,380 per share.Profits were buffeted by $1.59 billion of losses on derivatives, much of which were unrealized losses.
In case you forgot, Berkshire had sold put options on the S&P 500, FTSE 100, Euro Stoxx 50, and the Nikkei 225. Given the stock market’s poor showing in Q3, it’s no surprise that the value of Berkshire’s option positions fell.
However, these puts don’t start to expire until June 2018, which is consistent with Buffett’s long-term bullish thesis on stocks. Furthermore, these puts are European-style options, which means the buyer can exercise them only at expiration. So, Buffett has plenty of time to see the stock markets rebound.
If anything, the huge hit to Berkshire’s bottom line should serve as a reminder to those thinking about playing the volatile derivatives market. In fact, one of the most vocal critics of derivatives is Buffett himself. Check out the prescient comments he made about derivatives in his 2002 letter to shareholders:
We view them as time bombs, both for the parties that deal in them and the economic system…In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Anyways, we’ll have to check back with Buffett in 2018 to see if his bets paid off.
In case you were wondering, Berkshire’s operating earnings, which exclude the impact of derivatives, jumped 36.8% to $3.81 billion or $2,309 per share. Analysts were expecting $1,796 per share.