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In his 2002 letter to Berkshire Hathaway shareholders, Warren Buffett dubbed derivative securities as “financial weapons of mass destruction.” However, he has also made it widely known that he has huge investment positions in derivatives. Specifically, he is long long-dated call options on the S&P 500, Euro Stoxx 50, Nikkei 225, and the FTSE 100.
Anyway, don’t expect Buffett to take any new positions in derivatives. In his latest letter to Berkshire Hathaway shareholders, the Oracle of Omaha writes that he isn’t too crazy about the new collateral rules.
There is little new to report on our derivatives positions, which we have described in detail in past reports. (Annual reports since 1977 are available at www.berkshirehathaway.com.) One important industry change, however, must be noted: Though our existing contracts have very minor collateral requirements, the rules have changed for new positions. Consequently, we will not be initiating any major derivatives positions. We shun contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge posting requirement – arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack – is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength.
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