WARREN "THE WHIP" AND DERIVATIVES
An addendum to my last post re: Warren Buffett, the bell curve, etc.
I couldn't help but notice (with a wry chuckle) recently that when all the news broke regarding the Berkshire Hathaway shareholders meeting, it was revealed that Buffett had some holdings in "derivatives" on his books (along with his famous roster of classic blue chip value holdings, such as Coke, P & G, and many others). Here was the guy who "told us so" (about derivatives being the "time bomb" that would eventually cause calamity within U.S. financial markets); who warned all of us about the over-leveraging routinely practiced by hedge fund managers, investment officers at many of our largest corporations, etc. And yet he himself fell victim to their seductive song.
Unbelievable...
Surely there are some - emphasis on only some - good uses for the occasional derivative position (i.e., puts and calls - among other sophisticated strategies - on futures and options). Namely, for the hedging effect. You take a long position in equities, you want to "hedge" (or buy put options on, say, the S & P 100 to hedge your position should your equity position turn south the minute after you buy it and start to bore a hole through the floor to the earth's molten core). Some measure of "portfolio insurance" is natural and legitimate; as protection against the "unforeseens." In fact, derivatives had their genesis as hedging vehicles for farmers to lock in prices on their crops. Agriculture is where this all got started in the first place (not to mention the penchant for greed in the human heart when it came to the abuse of such contracts).
But the devising of cockamamie schemes to "beat the market" is where people get in real trouble. And it's this penchant for gambling (derivatives as "investments" = gambling) in the human heart that got us into the mess we are in now (especially our major banks). I stared incredulously at the news wire stories of Buffett himself having "positions" in various derivative instruments. And, as he ruefully admitted, he lost some serious money on these positions recently. Seems the master himself succumbed to the siren song of quick riches after all his years of wisdom and discipline! Funny how human nature is...
Just goes to show you: even the wisest among us are susceptible to doing stupid things. ("Wherefore let him who thinketh he standeth, take heed - lest he fall...") We all need to cast a wary eye towards all the slick Elmer Gantry-type financial hucksters pitching these things (and any number of other absurd schemes and "opportunities") to us. Beware, as Burton Malkiel says (author of the "Random Walk Down Wall Street" series), of "castles in the sky." The more sophisticated the scheme; the more slick and well-dressed the salesman/woman, the more my ears and eyes perk up and inner radar goes off. That's about the time you want to do a 180 and RUN the other way!
Buffett has recently come on record as saying that the world in general needs a whole lot of "de-leveraging." Amen to that. And he'll be "eating his own cooking" on this issue going forward, too.
The Madoff scandal is case in point. Last night (May 12), Frontline (PBS) did a piece on Madoff - who got away for nearly 4 decades with running the biggest Ponzi scheme in history, running phony "investments" and a phony "hedge fund" as the vehicle. Many thousands of people across the globe were drawn into this mess. If they themselves had done some due diligence (everyone was tossing this excuse back and forth on the show - usually blaming "the government" instead of themselves), they might've had at least a clue that something was rotten in the state of Denmark (or on the 17th floor of the "lipstick building" in NYC, where Madoff and his employees ran their "fund"). Any guy who claims to beat the market without fail over 4 decades (averaging 15-18% steady returns) and is secretive about both himself and his methodology should be something that should raise serious red flags. And Bernie was claiming to "beat the market" consistently during the down periods.
But people ignored the red flags, gave in to their own greed and ignorance, and held on for the ride. As long as they were getting paid the dividends, nothing else mattered. That is, until the "black swan" came long. In this instance, the total collapse of all world markets in synchronous fashion, as has happened over the past 2 years. There has been nowhere to "hide"; no asset class has escaped thoroughgoing destruction. A true "perfect storm" broke over the globe, the likes we have not seen since the Great Depression. (Even then there were several spectacular rallies in the 1930s - and bonds and gold did just fine, thank you.)
And when that perfect storm started to blow, Madoff's empire (and all the over-leveraged hedge fund nuts) took a stiff, hurricane force wind and all the houses of straw came "a-tumbling" down. The aftermath of a craze is never pretty; nor was it for the Madoff "investors" who finally got a dose of cold, hard truth in their morning coffee. And now Bernie goes off the hoosegow where he belongs to enjoy years of numbing solitude.
Another American con man bites the dust.
Let's hope the hedge fund nuts have gotten religion. And that the 2nd Glass-Steagall act ("The Banking Act" of 1933) is restored (separating banks from investment brokerages). Nothing was broken before, and nothing needed to be fixed in that arena. We have some serious "fixing" to do. Let's get to it...
TTC
I couldn't help but notice (with a wry chuckle) recently that when all the news broke regarding the Berkshire Hathaway shareholders meeting, it was revealed that Buffett had some holdings in "derivatives" on his books (along with his famous roster of classic blue chip value holdings, such as Coke, P & G, and many others). Here was the guy who "told us so" (about derivatives being the "time bomb" that would eventually cause calamity within U.S. financial markets); who warned all of us about the over-leveraging routinely practiced by hedge fund managers, investment officers at many of our largest corporations, etc. And yet he himself fell victim to their seductive song.
Unbelievable...
Surely there are some - emphasis on only some - good uses for the occasional derivative position (i.e., puts and calls - among other sophisticated strategies - on futures and options). Namely, for the hedging effect. You take a long position in equities, you want to "hedge" (or buy put options on, say, the S & P 100 to hedge your position should your equity position turn south the minute after you buy it and start to bore a hole through the floor to the earth's molten core). Some measure of "portfolio insurance" is natural and legitimate; as protection against the "unforeseens." In fact, derivatives had their genesis as hedging vehicles for farmers to lock in prices on their crops. Agriculture is where this all got started in the first place (not to mention the penchant for greed in the human heart when it came to the abuse of such contracts).
But the devising of cockamamie schemes to "beat the market" is where people get in real trouble. And it's this penchant for gambling (derivatives as "investments" = gambling) in the human heart that got us into the mess we are in now (especially our major banks). I stared incredulously at the news wire stories of Buffett himself having "positions" in various derivative instruments. And, as he ruefully admitted, he lost some serious money on these positions recently. Seems the master himself succumbed to the siren song of quick riches after all his years of wisdom and discipline! Funny how human nature is...
Just goes to show you: even the wisest among us are susceptible to doing stupid things. ("Wherefore let him who thinketh he standeth, take heed - lest he fall...") We all need to cast a wary eye towards all the slick Elmer Gantry-type financial hucksters pitching these things (and any number of other absurd schemes and "opportunities") to us. Beware, as Burton Malkiel says (author of the "Random Walk Down Wall Street" series), of "castles in the sky." The more sophisticated the scheme; the more slick and well-dressed the salesman/woman, the more my ears and eyes perk up and inner radar goes off. That's about the time you want to do a 180 and RUN the other way!
Buffett has recently come on record as saying that the world in general needs a whole lot of "de-leveraging." Amen to that. And he'll be "eating his own cooking" on this issue going forward, too.
The Madoff scandal is case in point. Last night (May 12), Frontline (PBS) did a piece on Madoff - who got away for nearly 4 decades with running the biggest Ponzi scheme in history, running phony "investments" and a phony "hedge fund" as the vehicle. Many thousands of people across the globe were drawn into this mess. If they themselves had done some due diligence (everyone was tossing this excuse back and forth on the show - usually blaming "the government" instead of themselves), they might've had at least a clue that something was rotten in the state of Denmark (or on the 17th floor of the "lipstick building" in NYC, where Madoff and his employees ran their "fund"). Any guy who claims to beat the market without fail over 4 decades (averaging 15-18% steady returns) and is secretive about both himself and his methodology should be something that should raise serious red flags. And Bernie was claiming to "beat the market" consistently during the down periods.
But people ignored the red flags, gave in to their own greed and ignorance, and held on for the ride. As long as they were getting paid the dividends, nothing else mattered. That is, until the "black swan" came long. In this instance, the total collapse of all world markets in synchronous fashion, as has happened over the past 2 years. There has been nowhere to "hide"; no asset class has escaped thoroughgoing destruction. A true "perfect storm" broke over the globe, the likes we have not seen since the Great Depression. (Even then there were several spectacular rallies in the 1930s - and bonds and gold did just fine, thank you.)
And when that perfect storm started to blow, Madoff's empire (and all the over-leveraged hedge fund nuts) took a stiff, hurricane force wind and all the houses of straw came "a-tumbling" down. The aftermath of a craze is never pretty; nor was it for the Madoff "investors" who finally got a dose of cold, hard truth in their morning coffee. And now Bernie goes off the hoosegow where he belongs to enjoy years of numbing solitude.
Another American con man bites the dust.
Let's hope the hedge fund nuts have gotten religion. And that the 2nd Glass-Steagall act ("The Banking Act" of 1933) is restored (separating banks from investment brokerages). Nothing was broken before, and nothing needed to be fixed in that arena. We have some serious "fixing" to do. Let's get to it...
TTC
posted by thoughtful conservative at 6:48 PM
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