The Oracle of Omaha loses his visionary powers – and feels the heat

A defensive performance in front of shareholders shows even Warren Buffett is not immune to the credit crunch

Warren Buffett’s sage investment advice and stellar profits long ago earned him the nickname the Oracle of Omaha, and his prediction that credit derivatives would prove to be “financial weapons of mass destruction”, which came gruesomely true last year, should have sent his reputation into the stratosphere.

And yet the billionaire investor was forced uncharacteristically on to the defensive at his annual shareholder meeting, asked to justify his investments in a credit rating agency at the heart of the financial crisis, a bank that had to take US government bailout money, and in derivatives that are continuing to erode his company’s profits.

Arecord crowd of 35,000 shareholders in Mr Buffett’s Berkshire Hathaway descended on this modest midwestern city over the weekend, but an event that is routinely dubbed the “Woodstock of capitalism” struck some less raucous notes this year.

The reason is that Berkshire’s shares have lost more than a quarter of their value in the past year, its investments have lost 10 per cent of their book value, and the company has lost its coveted AAA credit rating. It was 79-year-old Mr Buffett’s worst performance ever.

The exhibition hall at the Qwest Centre in downtown Omaha was again buzzing with Berkshire’s subsidiary companies hawking their wares. Shareholders guzzled Dairy Queen ice creams and stuffed bags full of See’s Candies chocolates.

There were Fruit of the Loom t-shirts for kids bearing the legend “Future Shareholder”. On stage, Mr Buffett swigged Coca-Cola, one of Berkshire’s longest-held stakes.

These are the products the Oracle never fails to name-drop as he dispenses his folksy advice, using them as examples of the timeless brands he says make lucrative and easilycomprehensible investments.

But the events of the past year have been a reminder that Mr Buffett’s empire is based in very large measure on less easily understood businesses: financial subsidiaries including insurance and reinsurance companies; shareholdings in American Express, theWells Fargo bank and Moody’s; plus a portfolio of his occasional bets – using derivatives – on the future direction of currencies, equity markets or government bonds.

His very first comments at the meeting highlighted a bet he had taken that US Treasury bills would fall between December last year and this April. In December, they were so highly priced that they were yielding nothing, as scared investors were effectively paying to house their money with the US government. “I don’t think we’ll see that again in our lifetimes,” he said.

Derivatives called equity put options – bets that the stock market will go up – are also going against Mr Buffett, dragging down his profits again in the first quarter of the new financial year, but he insisted that “the odds are extremely high” that they will make money over their 15 or 20-year life. Berkshire is also selling credit default swaps, effectively insurance against bond defaults, and Mr Buffett said he expected to lose money on those. A number of shareholders challenged him to explain how Berkshire could have allowed Moody’s, the credit rating agency in which it has a 20 per cent stake, to become so heavily involved in the credit derivatives market, giving a stamp of approval to trillions of dollars of mortgage derivatives that have since turned toxic, trashing the company’s reputation and opening it up to legal action – not to mention the wider fall-out for the world economy, since their gold-plated ratings encouraged a boom in mortgage financing, made mortgages available to poorer Americans and inflated a house price bubble.

Critics have argued that because Moody’s was being paid handsomely by the banks to rate instruments, it has a clear conflict of interest, but Mr Buffett said he didn’t think the payment system contributed to the disaster.

“Five years ago, nearly everyone in the country had made the judgement that house prices could not fall significantly. They made a major mistake, but they made a mistake that a great number of different people made,” he said. “If they had taken a different view, they would have been answering to Congress, which would have been asking why they were being un-American.”

In fact, Mr Buffett had gone out of his way to invite tough questioning this year. As always, Berkshire threw open the microphones to diehards who had been queuing from before dawn to seek his wisdom on topics from the government stimulus package (necessary, but with unpredictable consequences) to what the Chinese government should do with its dollar reserves (get used to the idea that their value will be eroded by US inflation). But he also took questions submitted by email and filtered by a panel of prominent journalists.

During the meeting, shareholders were given a sneak preview of Berkshire’s first-quarter results, which showed another decline in profits and in the book value of its investments.

Operating profits were down 12 per cent and book value by 6 per cent.

And Mr Buffett revealed that a new generation of managers that he is secretly grooming to take his place have also not shone through the financial crisis. He has identified four fund managers who could take over the chief investment officer part of his role at Berkshire (he has other candidates in mind to take over as chief executive), but all managed only to match the S&P 500 index last year – that is, they were down around 37 per cent. “For 2008 by itself, I would not say that they covered themselves with glory, but then I didn’t cover myself with glory either.”

“That was one of the most interesting things we learnt today,” said Brendan Watt, whose father owns Berkshire shares, and who had travelled from Boulder, Colorado, to help decide if he wants to buy shares of his own. “The risks are hard to quantify, since no one knows how the world will react to Mr Buffett’s passing. For now, though, it is interesting to see him screw up. It’s heartening for the rest of us.”



PROMOTED VIDEO
News
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
science
News
Dawkins: 'There’s a very interesting reason why a prince could not turn into a frog – it's statistically too improbable'
newsThat's Richard Dawkins on babies with Down Syndrome
Sport
Malky Mackay salutes the Cardiff fans after the 3-1 defeat at Liverpool on Sunday
footballFormer Cardiff boss accused of sending homophobic, racist and messages
Sport
Rodgers showered praise on Balotelli last week, which led to speculation he could sign the AC Milan front man
transfers
Life and Style
life – it's not, says Rachel McKinnon
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Test Lead (C#, Java, HTML, SQL) Kingston Finance

£40000 - £55000 per annum: Harrington Starr: A Global Financial Service Organi...

Access/Teradata Developer, Banking, Bristol £400pd

£375 - £400 per day: Orgtel: Access / Teradata Developer - Banking - Bristol -...

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home