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Poor Warren Buffett : Berkshire Hathaway Derivatives

If you read the Wall Street Journal story on Berkshire Hathaway, you might think that Warren Buffett is having the best year of his life.

“NEW YORK (MarketWatch) — Warren Buffett’s Berkshire Hathaway Inc. (BRKA, BRKB) said fourth-quarter profit rose 43% to $4.38 billion, buoyed by the improving stock market and a stabilizing of the economy.

A host of Berkshire-owned businesses that had suffered from declining sales and shrinking profits amid the recession now appear to be recovering.”

But that would mean that you are just a headline reader and not an in depth reader.  Warren Buffett is having a very bad year.   In the fourth quarter report, if you read about HOW Berkshire Hathaway had such a profitable quarter, you will see that very little of it was based on manufacturing something tangible.  Most of the income came from “paper bets”.

If you have ever wondered where the name Berkshire Hathaway came from, In 1962, Buffett began purchasing shares of Berkshire Hathaway, a struggling textile manufacturer in New Bedford, Massachusetts. Three years later he controlled the entire company. Berkshire Hathaway became Warren Buffett’s channel to buy distressed companies and turn them around. In other words, Warren Buffett likes to take a company that is making a valuable product poorly, or managing the sales of that valuable product poorly and turn it around.  The profit was just a result of what he loved doing.  The profit came naturally.

2010 was a very bad year for Mr. Buffett.  You may think that the recent news about the 4th quarter is proof that he had a wonderful year, but don’t forget the two previous quarters were losses. This was something completely foreign to Mr. Buffett.  He is used to not only winning every quarter, but also crushing the competition, which in his echelon, the only comparative measurement is the S&P 500. In 2010, the S&P 500 beat Mr. Buffet for only the third time in a decade.

When you get right down to it, 2010 was a horrible year for Warren Buffett. The silver lining news articles about his celebrated profits of the fourth quarter of 2010 were based mainly on derivatives. Mr. Buffett didn’t make his money on improved management of a company, improved marketing of a product, or expansion of a physical commodity globally. Mr. Buffett made his money on nothing more than a roulette table wager. Derivatives are not like a sale of a commodity. You are actually not investing on something that will be used, you are betting against another investor that says you are wrong. Derivatives are not even like stocks. The money you invest is not used to change anything about a company or product. Derivatives are simply a wager stating that you think the fortunes of one loan or insurance policy is going to go one way and another investor betting it will go another way. Derivatives are a gamble between very rich people.

You don’t have to dig far to find the losers. This year it was Swiss Re. that bet against Warren Buffet and had to pay off its gambling loss of 1.1 billion dollars to Buffet in 4Q 2010.

Mr. Buffett used a part of that pile of money to bail himself out of his Bank of America investment this month. Now he is on the podium touting how he has cash and is looking for good American companies to purchase. But when you look at his recent activities, you will realize that this is all fluff.  Another interesting side note to his 4Q derivatives profit is that he is a 5 billion dollar investor in Goldman Sachs, the very company that created many of these “side bets”.  Funny how Mr. Buffett wins on bets placed in the casino (Goldman Sachs) that he owns…

Mr. Buffett loves buying into good manufacturing. He loves making money on companies that make physical products. Like most rich people, if you cannot find happiness where you are, you simply go to where your happiness can be found. Mr. Buffett has found his happiness in China. He has made over 1 billion dollars in profit last quarter from his investment in BYD, a China car company that is progressing and expanding into environmentally friendly cars in a way that Mr. Buffett can appreciate. Unlike American car companies, this car company sees the future and is grabbing it. Mr. Buffett’s new manufacturing playground is China (and a little bit in India). Don’t look for him to throw good money after bad into American manufacturing. His investment into BNSF shows that Mr. Buffett understands that it is safer in transportation of goods in a “consumer only” society than to risk money in manufacturing in that same society.

When people like Mr. Buffett can only prosper on derivative gambles in countries like America, you should expect them to spend their time and money elsewhere. I do not see Mr. Buffett as a person who do not like sitting in front of slot machines all day. To him, I would think he thought it boring. America has only a slot machine to offer Mr. Buffett.

Itia (Abroad)

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