When last I checked in on junk food connoisseur, Bitcoin critic, and Dr. Jekyll to Charlie Munger's Mr. Hyde, Warren Buffett, he had just put the finishing touches on the latest edition of Berkshire's annual letter, which is mandatory reading for reasons that I will never understand.
Sure, Buffett has been in the news since then, but frankly I don't generally care because contrary to popular opinion, nothing he says is any semblance of relevant, let alone actionable. He's a wellspring of amorphous aphorisms that could just as easily apply to crossing the street as they could to investing and half the time, his interviews with Becky Quick could easily be mistaken for "Deep Thoughts, By Jack Handey", if you listened to them with your eyes shut.
The other thing about Buffett is that he's a notorious hypocrite. Just ask Dan Loeb. Or, if that's too cliché for you in terms of people pointing out Berkshire hypocrisy, here's an excerpt from a recent post by Salient's Rusty Guinn:
Consider Warren Buffett, the investing world’s moralizer-in-chief. Here he is on leverage.
- Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.
Here he is in 2003 on derivatives:
- No matter how financially sophisticated you are, you can’t possibly learn from reading the disclosure documents of a derivatives-intensive company what risks lurk in its positions. Indeed, the more you know about derivatives, the less you will feel you can learn from the disclosures normally proffered you. In Darwin’s words, “Ignorance more frequently begets confidence than does knowledge.”
Guess who sold protection on a bunch of munis starting in 2007, not entirely different in scope, although admittedly in scale, from similar trades that sunk AIG around the same time? Guess who, according to research from AQR, has historically generated his returns through effective leverage of 1.6-to-1?
To be clear, Rusty's point in the piece linked above isn't to malign Buffett (as Guinn writes, "using accusations of hypocrisy as an element of our political and social engagement is frequently counterproductive to the whole point of that engagement in the first place"). But those excerpts serve as a nice segue into a story that ran over at Bloomberg on Monday and I assume he won't mind that I took the liberty of employing his post in the service of poking a little good natured fun at Omaha's favorite grandpa who, as Bloomberg wistfully notes, is "beginning to say farewell to his equity derivatives."
As you're probably aware, Buffett is famous for characterizing derivatives as "financial weapons of mass destruction", which is appropriate, because that sounds like something your granddad might say after learning about the latest innovation in whatever line of business he was in before he begrudgingly retired.
Specifically, Bloomberg is referring to that stash of puts Buffett wrote on four benchmark indexes years ago. Those trades have been the subject of some debate over the years, and not so much because anybody really cared about the wild swings that came along with marking them, but rather because they served as low hanging fruit for folks itching for (more) proof that Buffett is a "do as I say, not as I do" type of octogenarian.
Here's a short history of these particular bets:
Terms on the equity options have shifted over the years. In a 2010 filing, Berkshire said it received $4.8 billion in premiums for 47 contracts. In late 2010, the company unwound eight of those options at the urging of a counterparty, according to Buffett’s annual letter to shareholders. That left Buffett’s company with 39 contracts and $4.2 billion in premiums. On some of the deals, the parties also have shortened maturities and reduced strike prices, according to Berkshire’s 2009 letter.
Again, there's nothing "wrong" with shorting a bunch of puts. And I guess there's nothing inherently "wrong" with characterizing that as something different in kind than the types of complex structures he's spent so much time lampooning in the past, either.
But there's just something annoyingly disingenuous about Mr. "Aw-Shucks" implicitly telling the investing public that all you need in life if you want to be a millionaire is an S&P index fund and then turning around and writing more than $4 billion worth of protection on that same index and then using the premiums to make other investments while the positions are still open.
Of course this is something he knows a lot about, because let's face it, Berkshire is basically just a giant naked put writing operation.
I mean, it's consistent because whether he's writing puts that don't expire for more than a decade or telling you to buy an index fund, he's expressing a long-term bullish view. But he probably wouldn't advise Joe the plumber to adopt a naked put writing strategy and use the premiums to aggressively expand his plumbing operation.
What's even more annoying is the way these bets are being described by ostensibly smart people. Take this quote, for instance, from one James Armstrong, who apparently manages nearly three quarters of a billion:
These derivatives are an example of his creativity. He saw a mispriced opportunity where Berkshire could make money because people were going to pay more for this insurance than it was going to cost Berkshire.
There is nothing creative about those trades - nothing. He just sold a shit load of European-style protection on four indexes he was sure were going to go up over the life of the contracts. It doesn't hurt that Buffett is one of the only investors in the world with the type of sway to singlehandedly restore confidence to jittery markets in times of crisis.
In any event, Bloomberg goes on to remind you that Buffett's index puts started expiring last month and will roll off completely by January 0f 2026 which, incidentally, will be the same year Charlie Munger celebrates his 178th birthday.