Buffett admits investment mistakes but shareholders keep the faith

Buffett admits investment mistakes but shareholders keep the faith

The legendary stockpicker dubbed the Sage of Omaha still wowing the crowds despite 35% drop in Berkshire Hathaway share price

Andrew Clark in Omaha, Nebraska
guardian.co.uk, Sunday 3 May 2009 19.47

It is usually a festival of financial self-congratulation in the US heartland. But a sombre tone descended on Warren Buffett's annual investor meeting as the legendary stockpicker was obliged to defend the worst year of his career.

Facing a record crowd of 35,000 shareholders in his Berkshire Hathaway business empire, who had come from as far afield as Australia and South Africa, Buffett admitted this weekend that he had failed to "cover himself in glory" since the global financial crisis began.

"It's been an extraordinary year," he said. "I'm not sure you'll see this again in your lifetime."

Held in Buffett's home city of Omaha, the quirky annual gathering of Berkshire's shareholders has become known as Woodstock for capitalists. Investors queued from 4am yesterday to snatch prime seats in the Qwest arena. A light-hearted video depicted the billionaire being demoted to a mattress salesman in one of his Nebraska Furniture Mart stores as punishment for the loss of Berkshire's treasured triple-A credit rating.

For six hours, Buffett, 78, and his lifelong business partner, Charlie Munger, 85, fielded queries chosen by a panel of journalists about their investment approach. "There's always a lot of things wrong with the world," Buffett told investors. "Unfortunately, it's the only world we've got so we have to deal with it."

Losing Berkshire's blue-chip credit rating, Buffett admitted, was "disappointing", causing the firm to "lose some bragging rights around the world" in terms of the rock-solid reliability of the insurance policies it sells. It was part of a string of setbacks for Berkshire, which has seen its shares slump by 35% since the start of 2008.

The book value of the company's assets, which include a stake in Tesco and ownership of Northern Electric, fell by 9.6% in only his second negative year since 1965. Investments ranging from Fruit of the Loom underwear to American Express credit cards and NetJets corporate aircraft caught the thick edge of the recession. First-quarter operating profits fell from $1.9bn (£1.3bn) to $1.7bn.

Shareholders, by and large, are still unstinting in their faith. Charles Hostetler, an insurance agent from Kansas, compared Buffett to a St Louis Cardinals baseball star of the 1960s, Bob Gibson. "You've got a great pitcher like Bob Gibson. He had one bad year in a 20-year career and 18, 19 good years," said Hostetler. "You wouldn't give up on him after one bad year, now would you?"

He added: "It wasn't a good year for Berkshire, but it wasn't a good year for America either."

But Wall Street critics say Buffett's Midas touch has deserted him through a series of unforced errors. A punt on two Irish banks went spectacularly awry as their stocks plunged by 89% and he made a costly investment in the energy firm ConocoPhillips just as the oil price peaked last summer.

Many have queried a decision by Buffett to plunge into derivatives – once scorned by the billionaire as "financial weapons of mass destruction". At the end of 2008, Berkshire had contracts with a notional long-term value of $67bn betting on the long-term performance of stocks and bonds.

Buffett has also found himself on the back foot over Berkshire's 20% stake in the credit-rating agency Moody's.

Quizzed about this, he said: "There was almost total belief throughout the country that house prices not only wouldn't fall significantly but would keep rising. The ratings agencies built that into their models."

The cult-like status of Buffett endures, despite these mishaps. In the Qwest arena's exhibition hall, shareholders snapped up packs of playing cards bearing images of Buffett and a popular T-shirt for children reads: "Warren Buffett is building my future."

Some took a more sceptical view. David Newton, a South African who came from Johannesburg for the meeting, welcomed the tougher examination of Buffett: "Last time I was here was completely a prayer meeting. If somebody had asked Warren if they should fly to the moon and he'd said yes, they'd have gone straight off and done it."

Still sprightly in his seventies and adept at playing the ukulele, Buffett has balked at publicly naming a successor, saying he sees no value in having a "crown prince" lurking around. He has, however, revealed that he has four potential proteges in mind. In a worrying sign, Buffett disclosed that none of these apprentice investment managers had beaten a 37% drop in the S&P 500 index last year. "You would not say they covered themselves with glory," he said. "But I didn't cover myself in glory either, so I'm pretty tolerant of that."


Bad news for papers

A former paperboy, Warren Buffett is a fan of newspapers but he offered a gloomy perspective on prospects for publishers struggling with falling readerships and dwindling advertising. "For most newspapers in the United States, we wouldn't buy them at any price," said Buffett, who has a stake in the Washington Post and owns the Buffalo News in New York.

Buffett said circulations were being eroded at an accelerating pace, hitting commercial revenue: "They were essential to advertisers only as long as they were essential to readers, and that is changing … I don't see anything on the horizon that causes that erosion to end." Although a technophobe, he feels newspapers, with the possibility of "unending losses", offer little attraction for investors.

http://www.guardian.co.uk/business/2009/may/03/warren-buffett-shareholder-meeting