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Kass: Buffett's Strategy Is Stale

This blog post originally appeared on RealMoney Silver on Jan. 28 at 7:56 a.m. EST.

"The first rule of investing is not to lose; the second rule is not to forget the first rule."

-- Warren Buffett

Over the past week, I have outlined the potholes in Berkshire Hathaway's (BRK.A) investment portfolio and the sharp drop in market value in some of Warren Buffett's largest holdings.

It was not my intention to overly dramatize the short-term miscues nor was it my intention to understate the remarkable long-term investment achievements of Warren Buffett. It was my intention to underscore that the strategy of investing in companies that have apparent moats to protect their business -- and these moats have been so dear to Buffett's investment strategy over multiple decades -- could either:

  • have been abandoned by the Oracle of Omaha, owing to his reluctance to alter/sell off his strategic and principal holdings and maintain a tax-efficient portfolio approach; or
  • have been influenced by his mistaken analysis of the changing competitive landscape facing some of his portfolio companies (in other words, the moat has been flooded!).

American Express (AXP), one of Berkshire's highest-profile investment positions is a good example of a company that has seen its competitive position arguably undergo a secular and adverse change, owing to the commoditization of its primary product, credit cards. As well, the company, a beneficiary of the consumption binge around the world over the past two decades, is now feeling the downside (something Buffett himself has warned about for several years) in unprecedented losses and insufficient credit reserves.

Page 14 of the 2007 letter to Berkshire Hathaway shareholders states that as of Dec. 31, 2007, Berkshire owned 151.6 million shares of American Express (13% of the total outstanding shares) at a cost of $1.287 billion ($8.52 a share) and with a market value of $7.88 billion ($52.20 a share).

According to my pal, Whitney Tilson, a close observer of everything Berkshire Hathaway, Warren Buffett put 40% of his origninal hedge fund (pre-Berkshire) into American Express shares during the Salad Oil Scandal in the early to mid 1960s and sold out the position at a large profit in 1967. He then repurchased the 150-million-plus share position for Berkshire in 1993 at an average price per share of about $8.50, and the shares trade at $16 today (after peaking at over $60 a share in 2007).

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