Billionaire investor Warren Buffett, who famously derided derivatives as "financial weapons of mass destruction," actually owns a bunch of them. That's apparently one reason Berkshire Hathaway's stock has dropped recently.

Our colleague Dan Costello was poking around and just sent in a link to Buffet's letter to shareholders back in February. Check out page 15.

Buffet explained that in some cases, the group hasn't actually lost money on these derivative bets yet — though their value has plunged.

Thus, our derivative positions will sometimes cause large swings in reported earnings, even though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will not be bothered by these swings — even though they could easily amount to $1 billion or more in a quarter — and we hope you won't be either.

 

Some of the derivatives amount to selling insurance on bonds. So far, that was going OK.

Berkshire had taken in $3.2 billion in premiums and had paid out a fraction of that in losses, though he said total losses could theoretically be $4.7 billion.

The second kind of derivatives amounted to insurance against stock market declines over 15- or 20-year periods. Berkshire has taken in $4.5 billion on this one, but recorded a liability of $4.6 billion. They won't actually lose that money until 2019 and later, and then only if the stock market is down.

Buffet recently told Bloomberg he would disclose more information about Berkshire's derivatives in the 2009 annual report.