Warren Buffett Warns Against Excessive Derivatives Investment

by Carla Johnson, Investors Offshore.com

07 March 2003

US investment guru, Warren Buffet has warned that the use by banks and other organisations of derivatives - contracts which are pegged to price changes in underlying assets and indexes - should be reined in, or at the very least made more transparent.

According to the Bloomberg news service:

'Banks such as J.P. Morgan Chase & Co and Goldman Sachs Group Inc are selling and trading more derivatives as slumping stocks push investors into new kinds of investments. Companies most often use derivatives to guard against swings in interest rates, currencies, or credit ratings.'

Despite the fact that Buffett's Berkshire Hathaway Inc last year netted $60 million by using derivatives known as put options - which offer the right to sell a security at a specified price and date - the billionaire investor came down hard on the instruments in his annual letter to Berkshire shareholders, arguing that:

'The range of derivatives contracts is limited only by the imagination of man, or sometimes, so it seems, madmen.'

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