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Forum LockedWarren Buffet's Weapons of Mass Destruction

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Ponce de Leon View Drop Down
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    Posted: 15-Jan-2009 at 17:33
Hi! I would like to discuss Mr. Buffet's (who was ranked by Forbes as the richest man in the world in the first half of 2008) weapons of Mass Destruction a.k.a DERIVATIVES.

To tell you the truth I do not understand derivatives very well. What I do know of them is that they are a very very risky investment. From a site called financial-dictionary.thefreedictionary.com it states that it is an asset derived from another asset. What this basically means is that you have options that you can buy that obtains value from the shares of a certain company that you are interested in.

The reason why derivatives get such a bad wrap from Warren Buffet and other respectful financiers is because they knew for a while that these assets were toxic. Since 2003 Mr. Buffet looked at the Derivatives market and saw more and more people trading with them. These people used derivatives to help off-load managed risk in the billions of dollars. With such complex financial instruments Mr. Buffet came to the reasonable conclusion that they were time bombs ready to explode in a lot of people's faces.

Here is a quote from Mr. Buffet on the issue:

"Derivatives generate reported earnings that are often widely overstated and based on estimates whose inaccuracy may not be exposed for many years."

Sadly I believe it has finally been exposed since the beginning of 2008. The United States and Europe are now facing the consequences of the derivatives market and the cost of overspending and not enough saving.

I personally would like to go into derivatives because I am young and I can take some extra risk that people older cannot/shouldn't take. What advice would any business savvy person have for me while taking on derivatives, and what personal insight could you share to the rest of the forum about your own experience with them. =)
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Post Options Post Options   Thanks (0) Thanks(0)   Quote pikeshot1600 Quote  Post ReplyReply Direct Link To This Post Posted: 15-Jan-2009 at 18:30

If you know Buffet's opinion of derivatives, and as you are aquainted with what has happened regarding unregulated securities that no one really understands, why would you be interested in going into that?

The robber barons have already made (and in many cases lost) the money that can expected to be made in that stuff.  The rocket scientists and the lawyers will find new opportunities to scam the gullible investor, so you can either wait for those, and get screwed then, or you can use your brain and invest gradually, in boring things, that actually make money you can count.

Your choice.
 
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 15-Jan-2009 at 18:58
Or of course you can work at it and join the scammers Smile
 
Bunging all derivatives into one basket is wrong. In the beginning they had a useful function in hedging risks, and many still do. Reinsurance, without which inurance cannot function, is a form of derivative creation. The derivatives that caused the most problems were situations where risk had, in theory, been minimised by pooling various risky assets and then selling shares in the pool. If the underlying risky assets are independent of one another, that actually does reduce risk overall: however it doesn't when the various pooled assets are correlated, as mortgage defaults and falling property prices turned out to be.
 
If that's unclear, think of insuring an apartment against fire. If the apartment catches fire, you (the insurer) can lose everything you've staked. However, if you have 20 apartments all carrying fire insurance, and 20 of you share the policies between you (so you have 1/20th the exposure on each apartment), your expected profit is the same, but the risk of losing on all of them becomes very small indeed (and therefore the pooled securities are worth more).
 
However, in all the apartments are in the same building, then the risk involved isn't reduced at all, because if one burns down so probably will the others.


Edited by gcle2003 - 15-Jan-2009 at 18:59
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Ponce de Leon Quote  Post ReplyReply Direct Link To This Post Posted: 17-Jan-2009 at 20:22
Originally posted by pikeshot1600 pikeshot1600 wrote:

If you know Buffet's opinion of derivatives, and as you are aquainted with what has happened regarding unregulated securities that no one really understands, why would you be interested in going into that?


The robber barons have already made (and in many cases lost) the money that can expected to be made in that stuff.  The rocket scientists and the lawyers will find new opportunities to scam the gullible investor, so you can either wait for those, and get screwed then, or you can use your brain and invest gradually, in boring things, that actually make money you can count.


Your choice.

 

 

The reason why was because even though people like Buffet say they are dangerous...it is one of the reasons why powerful moguls are in place today like George Soros. Plus it looks a little fun dealing with them. With my knowledge of history and cultures I might make good/better predictions than other fellows dabbling in derivatives who are less knowledgable.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote vulkan02 Quote  Post ReplyReply Direct Link To This Post Posted: 18-Jan-2009 at 23:19
It's probably too late to get into these things now, hedge funds and other similar institutions of financial wizardry that engaged in these are closing at a record rate. We shall see if the pseudo-benevolent George Soros and some of the other big-shots can take home that another $1+ billion this year as well.
The beginning of a revolution is in reality the end of a belief - Le Bon
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Leonidas Quote  Post ReplyReply Direct Link To This Post Posted: 23-Jan-2009 at 13:45
Originally posted by Ponce de Leon Ponce de Leon wrote:

Originally posted by pikeshot1600 pikeshot1600 wrote:

If you know Buffet's opinion of derivatives, and as you are aquainted with what has happened regarding unregulated securities that no one really understands, why would you be interested in going into that?


The robber barons have already made (and in many cases lost) the money that can expected to be made in that stuff.  The rocket scientists and the lawyers will find new opportunities to scam the gullible investor, so you can either wait for those, and get screwed then, or you can use your brain and invest gradually, in boring things, that actually make money you can count.


Your choice.

 

 

The reason why was because even though people like Buffet say they are dangerous...it is one of the reasons why powerful moguls are in place today like George Soros. Plus it looks a little fun dealing with them. With my knowledge of history and cultures I might make good/better predictions than other fellows dabbling in derivatives who are less knowledgable.
derivatives are generally ment to be hedges or cheap exposures when used correctly and are not really well designed to make money in isolation. it was when they got used that way is when it all went wrong.

 They are dangerous because some can potentially lose you, more than your worth. Yeah your young so think of the only sure thing compound returns and stop being so greedy. I would of thought  the essential collapse of then global financial system might of given you a bloody hint on how much pain they can add.

I don't know how it works in the US but i would imagine  if you go broke that stuffs up you ability to borrow later.

for instance, If you buy a stock the most you can lose is the money you put in, if you short one then you can lose allot more as the stock can go up, theoretically forever, but in reality enough to really really hurt. Please look at the recent comedy called 'the shorters that Porsche ran over at Volkswagen' to see how even professionals with a valid investment case can get burnt. some people use them for hedging - real portfolios, with stop losses and risk controls, or a simply great shorters. unless you can do that -Stick to Blue chips


Edited by Leonidas - 23-Jan-2009 at 13:57
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Leonidas Quote  Post ReplyReply Direct Link To This Post Posted: 23-Jan-2009 at 14:00
Originally posted by vulkan02 vulkan02 wrote:

It's probably too late to get into these things now, hedge funds and other similar institutions of financial wizardry that engaged in these are closing at a record rate. We shall see if the pseudo-benevolent George Soros and some of the other big-shots can take home that another $1+ billion this year as well.
best guesses ive read  is 30% will survive. It should mean the real ones with a proper ability and skill worthy of high(ish) fees albiet lower than before, survive and the leveraged up pretenders dont.
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