Back in 2003, Warren Buffett said that derivatives posed a "mega-catastrophic risk" to the economy. In a shareholder letter, he compared derivatives to "hell... easy to enter and almost impossible to exit." Buffett has also called derivatives a fool's game and, most famously, likened the contracts to "weapons of mass destruction."

All of this makes it all the more fascinating that Berkshire Hathaway's (NYSE: BRK.A) first-quarter profits plummeted due to $1.7 billion in losses on, you guessed it, derivatives. Peter Cohan wrote that "This proves that George W. Bush was right and so was Warren Buffett."

It would be like anti-prostitution zealot Elliot Spitzer getting caught with a call-girl. Oh wait ...

So what happened? Here's one possibility: Even after an $9 billion plunge in the company's cash position, Berkshire still had $35.57 billion in cash on its balance sheet. Warren Buffett is the greatest investor of all-time, but it's difficult to find enough undervalued stocks in sleepy industries to put that much money to use.

Given that Buffett may not be at the helm for too many more decades, even value investing disciples -- I consider myself one -- may want to look elsewhere for investors employing a similar style with more manageable assets to deploy. One possibility is Leucadia National (NYSE: LUK), which Aaron Katsman recently compared favorably to Berkshire Hathaway. A year ago, Jim Cramer named Brookfield Asset Management Inc. (NYSE: BAM) as the next Berkshire Hathaway.

What was Berkshire Hathaway doing with derivatives? originally appeared on BloggingStocks on Sat, 03 May 2008 09:40:00 EST. Please see our terms for use of feeds.