The richest man in the world, Warren Buffett, went vastly long on the British, European, Japanese and U.S. stock markets last year using broad stock index contracts, rather than individual stocks, he told Forbes.com Sunday in Omaha, Neb.
These contracts include the FTSE 100, Euro Stoxx 50 and the Nikkei, Buffett said, in addition to the S&P 500.
In its first-quarter report released Friday, Buffett's Berkshire Hathaway (nyse: BRKA - news - people ) disclosed it had sold derivatives on the S&P 500 and three foreign stock indexes that were set to expire between 2019 and 2028. By selling puts, Buffett was in effect going long, or owning those indexes until the date when the puts can be exercised.
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The indexes Berkshire is betting on are among the broadest measures of the Western and Japanese stock markets. The FTSE is an index of the 100 largest British stocks, including Rio Tinto (nyse: RTP - news - people ) and GlaxoSmithKline (nyse: GSK - news - people ), while the Euro Stoxx 50 contains major French, German, Dutch and Belgian companies like Alcatel-Lucent (nyse: ALU - news - people ) and Daimler AG.
Buffett arranged his multibillion-dollar positions by selling puts on these indexes. Berkshire will only have to make payments if the respective indexes fall below the levels they were issued at. "In the meantime, the premiums we have received are ours to invest freely," Buffett says in the quarterly report. At the end of 2007, the conglomerate had $4.5 billion in premiums and $4.6 billion in liabilities.
Berkshire has continued to enlarge its position. In the first quarter, it increased premiums by 8.5%, or $383 million, by selling more puts, and increased its liability by 34.8% to $6.2 billion. Berkshire recorded a first-quarter loss on the contracts of $1.2 billion.
The indexes Buffett is bullish on haven't fared well in the past year, given the turmoil in the credit markets. Over the last 12 months, the S&P 500 has fallen 7.9%, the FTSE dropped 4.1%, the Euro Stoxx is down 12.1% and the Nikkei has plunged 19.2%. His positions reveal that he is confident that the European, Asian and U.S. markets will move far higher in next 10 years and beyond.
Buffett warned that Berkshire's earnings may "swing widely because of the accounting regulations that govern the reporting of derivatives contracts," but that "that these contracts will prove profitable over the 15- to 20-year periods they cover, even if we exclude the investment income we can expect to earn on the $4.9 billion that we hold." Buffett did not disclose the exact size of this global bet, only remarking that "we’re talking billions and billions and billions and billions of dollars of these things."
Buffett’s disclosure comes as Berkshire places a greater emphasis on global opportunities. Since the company’s first foreign acquisition in 2006, ISCAR Metalworking, Buffett has flirted with the idea of a large takeover in Asia or Europe. During the shareholder meeting, he told investors that there will be a day when Berkshire has a company in China and India. For now, Buffett is setting his immediate sights on Europe--later this month he will be visiting Germany, Italy, Spain and Switzerland. (See: " Buffett Going Shopping In Europe")
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