retired aviator

The Financial Crisis: Getting the Best of Warren Buffett?

The recent criticisms of Buffet based on Berkshire shares falling or these so called derivatives he wrote are not well based. They are ignorant even. Buffet's genius lies in his ability to determine true risks and business moats, and to spot highly favorable math situations.

Though the insurance business is something of guesswork, which he admits, large premiums up front are super cheap capital which can be invested very profitably with his great expertise and the insurance business is thus not that risky.

BRK shares being down doesn't bother him. He knows that the businesses the shares represent will continue to grow earnings over time and have healthy and growing returns on equity, so if the market is beating down the companies he owns because of widespread pessimism, he'll be glad to buy more shares. Watch for his year end report and mark my words, you'll find he has been buying like crazy. That doesn't mean the shares won't fall further, but 5-10 years from now you can bet their earnings, book value, and eventually share price will climb very nicely.

As for the puts on the major indices starting around 2019, the buyer was an idiot! A dozen years out for at the money (current index level)! Any money manager of billions of $ ought to have better math skills and some knowledge of economic history. As long as GDP doesn't stagnate for a whole decade with little to no growth, the growing economy will be reflected in growing businesses that leverage even faster-growing profits. The beauty of an index bet is that you don't have to pick the winners. As long as the whole pie grows just as it has consistently (except during the Great Depression) since the days of the Pilgrims, Buffet will pay nothing on this bet.

The key is the simple and profound principle of long term compounding, which the stock market currently does not understand. The growth of an economy such as ours is by a percentage of the prior year rather than a fixed amount. That is why the DJIA grew 175-fold in the last century, from a value of 66 to 11,500, which is only 5.3% annually! The Dow was simply loosely tracking the GDP. Why anybody would pay serious money to protect against a stagnant or falling GDP after a dozen years is beyond me, given that history lesson. Buffet does not "play" in risky derivatives. Selling these puts was a steal.