The Most Profitable Business in the World

Warren Buffett, in 10 paragraphs of breathtaking audacity, made a statement that the press seemed to have paid scant attention to:

[A 9-Paragraph critique of blind and incorrect application of Black-Scholes option valuation formula, followed by:]

"Even so, we will continue to use Black-Scholes when we are estimating our financial-statement liability for long-term equity puts. The formula represents conventional wisdom and any substitute that I might offer would engender extreme skepticism. That would be perfectly understandable: CEOs who have concocted their own valuations for esoteric financial instruments have seldom erred on the side of conservatism. That club of optimists is one that Charlie and I have no desire to join."

Translation: "Our long-term equity insurance business is so profitable because people are incorrectly pessimistic about the long run, using the wrong formulae, applying them the wrong way, and we'll gladly continue to accommodate because they're stuck with that way of thinking. And we don't care if they're reading this."

And that leads us to marveling at this 31-person operation in Stamford, Connecticut headed by one Ajit Jain, that generated $1.3 BILLION in profits in 2008, and likely more in 2009 as people rush to buying more insurance protection for their various positions. Too dearly, too late.