“Investor Warren Buffett calls derivative contracts “financial weapons of mass destruction, carrying out dangers that while now latent are potentially lethal,” according to excerpts from his forthcoming annual letter to Berkshire Hathaway Inc. shareholders, writes Richard Gibson in today’s Wall Street Journal.

“Mr. Buffett, whose company is seeking to divest itself of a derivatives business tied to its General Re purchase, also worries that substantial credit risk has become concentrated ‘in the hands of relatively few’ dealers of derivatives — the often-complex financial contracts that allow pros to bet on stocks, bonds and currencies, often wagering more than they own.”

“The Berkshire chairman also discloses that he isn’t enamored of most common stocks today. ‘We will sit on the sidelines,’ he said in the letter, portions of which appeared Monday on the Fortune.com Web site.”

“The excerpts include a section on high-yield, or junk, bonds. ‘Last year we were… able to make sensible investments in a few ‘junk’ bonds and loans,’ he is quoted as writing. ‘Overall, our commitments in this sector sextupled, reaching $8.3 billion by year-end,’ he said.”

“The entire letter is scheduled to be published on Berkshire’s Web site (berkshirehathaway.com) this coming Saturday.”

“While much of the letter apparently will deal with Mr. Buffett’s views on financial derivatives, other segments highlight his current opinion of the stock and or junk-bond markets. On stocks, he writes, ‘Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge.’ “

“Mr. Buffett said that unless he sees a ‘very high probability of at least 10% pretax returns’ from an equity issue, ‘we will sit on the sidelines.’ “

“The so-called Oracle of Omaha issued this advice: ‘Occasionally successful investing requires inactivity.’ “