Net earnings attributable to Berkshire shareholders went from $3,295,000 in the second quarter 2009 to $1,968,000 in the second quarter 2010. The reason for this are derivative losses.
Derivative losses is a nice wording for losses with selling put options on indexes and playing around with high risk credit default obligations.
Warren Buffet is usually known for extremely conservative investment strategies. What comes to light here looks more like gambling then anything else. Money lost with put options and non-investment grade credit default obligations can not be called exactly conservative, to say the least.
Berkshire Hathaway used to have an excellent credit rating. Now it looks different. Here from the Q-10 secong quarter:
As of June 30, 2010, had Berkshire’s credit ratings (currently AA+ from Standard & Poor’s and Aa2 from Moody’s) [has] been downgraded below either A- by Standard & Poor’s or A3 by Moody’s an additional $1.1 billion would have been required to be posted as collateral.
While it is nice to sell put options on indexes and pocket the premiums, derivatives like these carry quite some risk. The same is true for high yield investments. That these moves were able to reduce the profit by 40% shows that there was relatively too much money devoted to these high risk strategies.
What is embarrassing in the whole scenario is that this was done by Warren Buffet, who wants to make believe that the ultra conservative strategy of buy and hold is the best investment advice.
From the Q-10:
The equity index put option contracts are European style options written on four major equity indexes. Future payments, if any, under these contracts will be required if the underlying index value is below the strike price at the contract expiration dates which occur between June 2018 and January 2028.
At June 30, 2010, the aggregate intrinsic value (the undiscounted liability assuming the contracts are settled on their future expiration dates based on the June 30, 2010 index values) was approximately $6.4 billion.
That basically means Warren Buffet made a bet that the stock market will go down. If the stock market recovers, it will cost him dearly. These "investments" made a profit of $ 840,000 in 2009 and now turned into a loss of $ 1,765,000 in the first six months of 2010.
Warren E. Buffett, Berkshire’s chief executive, has said, as reported by the NY Times, the indexes are the Standard & Poor’s 500, the FTSE 100, the Euro Stoxx 50 and the Nikkei 225.
The investment strategies that are applied here can be called gambling. Things like that usually result from an insecurity in regards to the core business. These less than smart moves are not yet reflected on the Berkshire Hathaway stock price, as the press release appeared after the close on Friday.
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