'Sage of Omaha' warns shares will provide slower returns

Warren Buffet, the investment guru fêted as the "Sage of Omaha", has warned his followers to expect slower returns from his portfolio of equities in coming years.

His downbeat comments came as Berkshire Hathaway, his investment company, posted the first fall in profits since Mr Buffett took over in 1965.

In his annual letter to shareholders, the 71-year-old billionaire confessed to "decidedly lukewarm feelings" about the prospects for shares over the coming decade.

"I believe that American business will do fine over time but think that today's equity prices presage only moderate returns for investors," he wrote. "The market outperformed business for a very long period, and that phenomenon had to end. A market that no more than parallels business progress, however, is likely to leave many investors disappointed, particularly those relatively new to the game."

Berkshire Hathaway, based in Omaha, New England, saw its net worth decline in 2001 for the first time in 37 years. It fell by $3.8bn, a 6.2 per cent decline, compared to a minus 11.9 per cent return on the S&P 500.

The company's equity portfolio, managed by Mr Buffett, lost nearly 24 per cent of its value in 2001. Mr Buffett had escaped the effects of the bear market the previous year because he had shunned telecoms and internet investments in the late Nineties, preferring instead what he called solid, old-fashioned businesses he understood.

But the portfolio – which includes stakes in Coca-Cola, American Express and The Washington Post, and took a 4 per cent stake in the credit rating business Moody's Corp during the year – fell from $37.6bn in value at the end of 2000 to $28.7bn on 31 December 2001.

"Though our corporate performance last year was satisfactory, my performance was anything but," he wrote. He held out little hope for a dramatic rebound in performance, though, saying that even now the stocks are not noticeably undervalued.

The terrorist attacks on the World Trade Centre led to a 76 per cent fall in profits across the Berkshire Hathaway group. General Re, its reinsurance business, took losses of more than $2bn as a result of 11 September.

Although Mr Buffett said he would not take on liabilities beyond what the group can comfortably handle, he promised the experience would not deter it from writing insurance against terrorism losses. Indeed, he told shareholders there were significant profits to be made.

"We have for some years been willing to assume more risk than any other insurer has knowingly taken on. That's still the case. We are perfectly willing to lose $2bn to $2.5bn in a single event – as we did on 11 September – if we have been paid properly for assuming the risk that caused the loss – which on that occasion we weren't.

"Over time, insuring these jumbo risks should be profitable, though periodically they will bring on a terrible year."

Mr Buffett, the world's second richest man, took control of Berkshire Hathaway in 1965 and has presided over an average annual gain of 22.6 per cent in the company's book value. On Friday, the shares closed at $71,800 on the New York Stock Exchange, barely changed on a year ago.