From his 2008 annual report
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The second category of contracts involves various put options we have sold on four stock indices (the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of $4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between 2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate, will be profitable and that we will, in addition, receive substantial income from our investment of the premiums we hold during the 15- or 20-year period. Two aspects of our derivative contracts are particularly important.
First, in all cases we hold the money, which means that we have no counterparty risk.

Second, accounting rules for our derivative contracts differ from those applying to our investment portfolio. In that portfolio, changes in value are applied to the net worth shown on Berkshire’s balance sheet, but do not affect earnings unless we sell (or write down) a holding. Changes in the value of a derivative contract, however, must be applied each quarter to earnings.
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Disclosure I'm a huge admirer of Buffett. Even going back to his hedge fund days in the 50's he had the quality I believe is most important to an investor- the ability to ignore the maddening crowd. Time after time he was called an idiot or worse, during the recession in 1958, the downturn in 1960, getting out of the market in 1969 and 1987(though people changed their minds sharpish) and of course ignoring for the internet hoopla of the late 90's. I actually enjoy going back and reading the stories in Fortune and Time calling him a has been for ignoring such great opportunities as pets.com. In comparing the wisdom of Warren Buffett and Daniel Kudlec I think I'll stick to Warren
http://www.time.com/time/magazine/article/0,9171,1101000515-44525,00.html

Final thought in 1975 his portfolio had lost 33%, the washington post company had gone down 25% almost immediately after he bought ~11 million dollars worth. He managed to ignore the pollyannas of doom and that investment is now worth 1.7 billion dollars not counting the rich dividends over the years.

One more comment. Reading the junk media's take on Warren Buffett captures the provocative but rarely the essence. His take on derivatives came after his unwinding of the General Re positions as he details in his 2003 annual report which in summary was that valuing a derivatives rich company is difficult. Made worse when the employees on both sides of say a 100 year contract can write it to mark it as profit and hence a bonus for said employees.

Any weapon is dangerous in the wrong hands. I believe his perspective on derivatives is captured more clearly in the 1989 letter one of the better ones on EBITDA and zero coupon financing and Investment Bankers:
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Whatever their weaknesses, we should add, many zero-coupon and PIK bonds will not default. We have in fact owned some and may buy more if their market becomes sufficiently distressed. (We've not, however, even considered buying a new issue from a weak credit.) No financial instrument is evil per se; it's just that some variations have far more potential for mischief than others.

http://www.berkshirehathaway.com/letters/1989.html

I like the assertion that Liddy stood tough to Geithner. But I'm going to be bold and make two (seemingly obvious) predictions
1. The bonus money will be paid back
2. Liddy won't last the month.

I don't know what it was like to be a banker trying to foreclose on farms in 1932(a few got tarred and feathered, and they had dollar sales where the neighbors bought the farm for a dollar and gave it back to the families) but I think being a banker now is like being a dotcommer in fall 2001 trying for a new IPO.

Bess,
Whatever happened to the "First Portfolio" his march 3 market call seems almost omniscient now :-)

Bess,
Whatever happened to the "First Portfolio" his march 3 market call seems almost omniscient now :-)

Apologies Bess, recalled the blurb not the byline.

Apologies Bess, recalled the blurb not the byline.
And I prefer omniscient, he is the messiah :-)

I'm in Iraq, flying missions over Bdad and it's always refreshing to come back to Dealbreaker(and Bess' twisted slant on everything:-). It makes reading the WSJ alot more interesting.
Thanks!

Maybe because I had so much fun landing on one (plus I'm sure it pissed of the Navy nuke types) but gotta love this cover
http://www.youtube.com/watch?v=mM9vwbhF43Q

Haha #42 and #44 I'm actually still active duty and just got back from a combat mission over Bagdad flying EA6-B's.

Flew T-45Cs out of Meridian carrier qualed on the old USS John F Kennedy in March 2005 :-)

But I guess you could call me a wanna-be

Haha #42 and #44 I'm actually still active duty and just got back from a combat mission over Bagdad flying EA6-B's.

Flew T-45Cs out of Meridian carrier qualed on the old USS John F Kennedy in March 2005 :-)

But I guess you could call me a wanna-be

As far as fraud Waste, from what I can tell the clips are simply launch and recovery ops on the boat, though you could gig them for goofing off when they could have been studying.

And while on the internet no one knows you're a dog so who knows if I'm telling the truth, but these may convince a more dispassionate observer
http://good-times.webshots.com/album/308046089mseiyH

TGFD thanks, I deserved that one. Doh

Thanks but I'm not too worried. What are they going to do shave my head and send me to Iraq :-)

Ah Bess, gotta love your twisted take on old Warren. As an avowed Buffetologist I'm scared you'll read his annual letters and find such gems as the story of "Apassionata von Climax" :-)

The article is interesting. When Buffett says he doesn't understand something it's not because the man is slow, but simply because he looks for businesses that are either monopolies or strong franchises. How do you differentiate pets.com, hotbot.com, go.com and google.com?

While I can't say I enjoyed the meltdown, I wonder if we'll ever see such cheap stocks again. Western Digital which I felt a steal at $20 was going for $10! Harry Winston Diamonds I valued at $5 was selling for $1!

Even venerable GE a good deal at $20 was selling for $6.

The weekened of March 1st I recall being mad that I didn't have a few million in loose cash. Blessed are those with dry powder

The issue is really that the owners of capital(shareholders) are divorced from exercising power which in modern times is in the hands of Boards and institutions. Thus while the private owner would have major issues in paying the compensation we've come to expect, we cannot reasonably expect a board that has no ownership interest to police management.

I still believe that in capitalism, those who lay out the equity should reap the rewards. The factory worker shouldn't get the same pay as Henry Ford

Ah Bess, something about that devious little mind of yours.
After reading through Dealbreaker, serious forays into WSJ are break down with images of Kenny boy as an alky, Lil Timmy Geithner needing a hug and of course Old Warren, clad only in a bathrobe shuffling up for an interview with Becky Quick, one hand mysteriously missing.
Thanks!