Berkshire Hathaway's (BRK.B) stock has been under pressure in the past year, and a few observers have taken to the airwaves to criticize the firm for its recent investment performance. Some of the largest holdings in the firm's equity portfolio have declined significantly, particularly its common equity investments in financial services firms such as Wells Fargo (WFC), American Express (AXP), and U.S. Bancorp (USB). The firm's soon-to-be-released annual results for 2008 are likely to include some significant losses in its equity portfolio, particularly in the fourth quarter. In turn, Berkshire's reported 2008 results will also include investment-related losses on equity derivatives contracts.
Berkshire has written long-dated put options on a number of stock indexes in recent years. In exchange for more than $4 billion in cash, Berkshire has provided protection for counterparties against long-term stock market deterioration. They are "European-style" options, meaning that they require payment from Berkshire only if the underlying index on the exercise date--the earliest of which is 2019--is below where it was when the option was written. The amount Berkshire pays, if it does have to pay, depends on how far the index is below where it was when the contract was struck; the bigger the decline (if any), the larger the payout from Berkshire.
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Bill Bergman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.