Kass: Buffett Veers Off His Investment Path

Nevertheless, I stood by my analysis and initiated a short, and I even shorted more Berkshire several weeks later.

The night before Buffett's Woodstock of Capitalism, Berkshire Hathaway reported horrible first-quarter 2008 results, weighed down by derivative losses and disappointing results in the company's insurance operations.

There was little coverage of Berkshire's weak first-quarter performance, though Citigroup's research analyst downgraded the stock a week or so later, as it occurred on the eve of the company's Annual Meeting (and pilgrimage to Omaha) -- a much ballyhooed event, which was covered widely by most business news networks.

"Even Napoleon had his Watergate."

-- Yogi Berra

There was even less coverage of Buffett's recent foray into derivatives. Berkshire's exposure to derivatives increased by $16 billion, to $40 billion, in the last year.

"Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

-- Warren Buffett

Over the past five years, Buffett frequently called derivatives "financial weapons of mass destruction", comparing derivates to "hell...easy to enter and almost impossible to exit." Yet, he has, very much out of character, immersed himself in a large and, thus far, unprofitable derivative transaction. His investment successes have not been in speculating in the market (something he has been critical of) but rather by purchasing easily understandable companies with dependable cash flows that sometimes seem imperiled by an exogenous event and are available on the cheap.

It immediately occurred to me after gazing at Buffett's style drift (manifested in Berkshire Hathaway's large first quarter derivate losses) that he might be increasingly viewed as the New Millennium's Ben Franklin, a man who wrote "early to bed and early to rise" but spent many of his evenings in France, whoring all night and showing up to work after noon (to the massive frustration of John Adams). I concluded that Warren Buffett was getting a free pass and had drifted away from an investment process that had rewarded both him and Berkshire's shareholders so dramatically over the years.