Warren Buffett. AP ImagesWarren Buffett warned against speculation on options and accused Robinhood for encouraging it.In 1982, the investor wrote to Congress expressing similar concerns regarding futures trading.Buffett predicted mass gambling and heavy losses for investors. This would also cause damage to the image of the stock market.Check out more stories from Insider's business page.Warren Buffett warned against speculation on options. Robinhood was accused of encouraging people to gamble on options instead of investing long-term. Nearly 40 years ago, the billionaire investor and Berkshire Hathaway CEO predicted that derivatives would lead reckless traders and risky trading.In 1982, Buffett wrote a letter to John Dingell (the late Democratic politician who served nearly 60 years in the House of Representatives). This week, the investor's letter was resurfaced by 10-K Diver on Twitter. He is a user of the platform who teaches investing and finance concepts.The Berkshire chief wrote Dingell warning against futures that were tied to the S&P 500 Index. Buffett acknowledged that shorting the contracts could be used to hedge against volatility in the short term, but warned that almost everyone who buys them is betting on stocks rising in near future - and not on the long-term performance.Buffett stated that "the propensity to gamble increases when there is a larger prize than a low entry fee, regardless of how low the odds are." This is why Las Vegas casinos boast big jackpots, and state lotteries offer big prizes.He said that "the unintelligent" are easily seduced by low prices and great upside. He cited penny stock brokers and promoters who allow trading with minimal margin. He said that gamblers could use futures on S&P 500 to bet on short-term index direction while avoiding the margin requirements.Buffett explained that futures could lead to excessive speculation and cause investors to lose money.He said that the casino (the futures markets and their supporting cast of brokers) is paid a fee for each transaction. This means it has a strong interest in providing large numbers of winners and losers.He also stated that futures trading would be a "negative sum" game for investors due to transaction costs. He said that investing in stocks, on the other hand, is a "positive sum" game because the underlying companies grow and produce more money for shareholders.Buffett predicted that 95% of futures trading would be strictly gambling. He predicted that small amounts of money would be used to place large stakes on short-term stock movements. Brokerages would encourage traders to trade more to increase their profits.Brokers would be better if they did not let customers spend their money, Buffett said. But they are too short-sighted to take care of their clients. He noted that brokers are often most happy when their behavior is at its most silly.Berkshire Chief also warned futures would damage the stock market's reputation, as many people will be "burned" by them and put their losses on stocks.Buffett also argued that the country needs more people who invest for the long-term, and not more brokers who encourage them to gamble. He said that future trading volumes in large quantities would also be detrimental to markets and the security-buying public.Buffett's warnings regarding futures almost 40 years ago could easily be applied to options today as a new generation continues to trade them on the basis of memes and social media.
