Warren Buffett 1982 Letter On DerivativesVW Staff
There has been some recent controversy over Buffett and derivatives. Well we found a much older source on this topic. Check out below a letter which Buffett sent in March 1982 on the topic.
March 5, 1982
The Honorable John Dingell-011, U. S. House of Representatives, Rayburn House Building, Washington, D. C. 20515.
Dear Hr. Dingell:
This letter is to comment upon the likely sources for trading activity that will develop in any futures market involving stock indices. My background for this commentary is some thirty years of practice in var-ious aspects of the investment business, including several years as a securities salesman. The Last twenty-five years have been spent as a financial analyst, and I currently have the sole responsibility for an equity portfolio that totals over $600 million. I am enclosing copies of several articles that relate to my experience in the investment field.
It is impossible to predict precisely what will develop in investment or speculative markets, and you should be wary of any who claim precis-ion. I think the following represents a reasonable expectancy: 1. A role can be performed by the stock index future contract in aiding the risk-reducing efforts of the true investor. An investor may quite logically conclude that he can identify undervalued securities, but also conclude that he has no ability whatsoever to predict the short-term movements of the stock market. This is the view I maintain in ao, own efforts in investment management. Such an investor may wish to “zero out” market fluctuations and the continual shorting of a representative index offers him the chance to do just that. Presumably an investor with $10 million of undervalued equities and a constant short position of $10 million in the index will achieve the net rewards or penalties attributable solely to his skill in -selection of specific securities, and have no worries that these results will be swamped – or even in-fluenced – by the fluctuations of the general market. Because there are costs involved – and because most investors believe that, over the long term, stock prices in general will advance – i think there are relatively few investment professionals who will operate in such a constantly hedged manner. But I also believe that it is a rational way to behave and that a few professionals, who wish always to be “market neutral” in their attitude and behavior, will do so.