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‘Weapons of Mass Destruction’ Cost Berkshire $300 Million in 2018

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Weapons of mass destruction

In his 2002 shareholder letter, Berkshire Hathaway (BRK-B) chair Warren Buffett shared his views on derivatives. He called derivatives “time bombs, both for the parties that deal in them and the economic system.” He also termed them toxic and “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Meanwhile, over the last decade, Berkshire Hathaway has been active in index derivative contracts. In its 2018 annual report, the company said that it has written European style equity index put option contracts on “four major equity indexes.” It also said, “contracts with notional values of $12.2 billion will expire in 2019.” Berkshire Hathaway reported a $300 million loss on derivative contracts last year. It reported gains of $718 million on derivative contracts in 2017.

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Index put options

We should remember that since Berkshire Hathaway has written put options on the index, it stands to lose if markets (SPY) fall sharply like in the fourth quarter of 2018. Even Berkshire Hathaway’s holdings were not immune to the sell-off. All the FAANG stocks (FB) (AMZN) (GOOG) (NFLX) including Apple (AAPL), which was Berkshire Hathaway’s top holding, fell sharply in the fourth quarter.

Bank of America (BAC), Wells Fargo (WFC), American Express (AXP), and U.S. Bancorp (USB) lost 16.4%, 12.3%, 10.5%, and 13.5%, respectively. Moody’s (MCO) and Goldman Sachs (GS) lost 16.2% and 25.5%, respectively. J.P. Morgan Chase (JPM) also lost 13.5% in the fourth quarter.

On several occasions, Buffett has praised J.P. Morgan’s CEO Jamie Dimon. In the next and final article, we’ll see how Buffett’s views on cryptocurrencies contrast from Dimon’s.

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