Buffett has some advantages, but he earned them
From FT Alphaville, a report on Pablo Triana, Professor at ESADE business School, who has shed new light on the way Buffett makes money when it comes to his large portfolio of derivatives.
It starts off with the stuff we know:
- Buffett … act(s) unlike most other investors and financial entities. He invests in a genuinely long-term sense. He says he does not care about quarterly fluctuations in earnings or returns, and means it.
- Also … other Buffett skills — selling risk when many others are buying (pushing the price beyond what is rational) and the confidence that he will be able to invest the additional float successfully over time to make the whole enterprise worthwhile
It then goes on:
- One of the reasons why the bets have worked, and why Berkshire has since stopped making them, is that it was able to agree very large derivative contracts where it received all the premium up-front, and then did not have to post collateral
Three key factors (available to Buffett) that may not have been available to all market players are:
(1) very soft collateral requirements,
(2) utter disregard for quarterly earnings volatility, and
(3) the ability to find buyers of sizable and often heterodox contracts.Other players may have faced much more stringent collateral requirements.
Other players may care much more about continuous earnings turbulence.
Other players may not be able to sell such contracts. Buffett is very clear about it: If he had to face “normal” collateral rules, he would not have entered into the trades.
While the headline to this piece mentions things you "can't" do, I think that's not necessarily true. Take point 2, for example. Its probably more applicable to an investment outlook than a trading outlook, but if you are not concerned with short-term fluctuations in valuation its easier to hold for the long term (make sure you get your long-term investments right, though!).
Its an instructive piece: The Buffett difference, derivatives edition
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The thing to remember about Buffett, in the context of those 3 factors (and others, of course) is that they weren't always available to him. He's a human and he has had to work his way to where he is. A great place to start with understanding Buffett is one of the many books available that cover his life and work so far.
