Buffett offers a $14B safety net?

[On the Road]

Billionaire investor Warren Buffett is making a $14 billion bet on global stock markets, according to an article Tuesday.

Buffett's Berkshire Hathaway has sold clients insurance protection against a drop in four equity indices, the Financial Times reported.

If the indices, three of which are outside the U.S., fall by 30 percent over the 15-20-year life of the contracts, Berkshire would incur a pre-tax loss of about $900 million. It has a maximum exposure of $14 billion, according to the report.

Analysts told the paper that the purchasers of the index contracts were probably pension funds that wanted to increase their potential long-term returns by holding more equities but needed protection in case of a stock market meltdown.

http://biz.yahoo.com/cnnm/060404/040406_buffet_global_markets.html

I have to admit, this makes me think twice about buying short funds right now. On the other hand, the horizon is 15-20 years . Even if there's a crash, that's a lot of time for the market to recover. Buffett doesn't seem to be offering three-year or five-year policies.

[northzax]

1. depends on what markets they are

and is this a 30% decline in real terms, or against inflation? an increase of 30% in 15-20 years is an incredibly safe bet, I think the premiums are pretty small. what major equities market has lost this kind of money, over this length of time?

think of it this way, it you made an average of 5% a year on the index, over the 15 years, you still have room for one 50% crash and still do a little better than even.

[On the Road]

4. There Have Been a Couple of 30-Year Periods

during which the market was flat. One was during the depression. The other, IIRC, was when the Dow proved unable to break 1,000 for many years.

Over 15 years, there have been times when the market has declined 30%, but they're very limited -- thus the small premium.

A few months ago, I talked with a financial advisor from Morningstar for possibly rolling over a company lump-sum retirement plan. He was offering plans which guaranteed that you would not lose more than 10% over a ten-year period. In addition, if the market skyrocketed at some point, you could lock in your gains and be assured of keeping at least 80% of the value from that point. Very attractive -- I might actually do that upon getting vested.

[papau]

2. I priced a 5 year asset guarantee plus 5% interest per year and it was

not that costly. There were also other actuaries at AXA involved in pricing the product- but in any case a 20 year guarantee of the initial investment only - and in this case only 70% of the initial investment - would be extremely cheap. - there must be more to the contract. If not, this is just a competitor for the AXA product - and indeed it will not bring much income to the bottom line because of the tiny premium.

[On the Road]

3. The Premium May Not Be What They're After

They might be simply trying to draw (or retain) investors worried about the markets being overpriced. Although it's probably structured to be an incredibly safe bet, Buffett's firm can then sell the impression of lower risk, which is worth a lot.

[MercutioATC]

5. My 401k is solely in small caps and international stocks.

Both sectors are showing 25% gains over the last 12 months.

(indexed to the Wilshire 4500 and the EAFE Stock Index)