This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Rule-Breaking Buffett Gets Burned

Stocks in this article: BRK.A BRK.B KFT

NEW YORK ( TheStreet) - Throughout his wildly successful, multi-decade long investing tenure, Warren Buffett has offered investors countless nuggets of wisdom which can greatly aid everyday investors in their attempts to navigate any market environment.

For this reason, it is no wonder that the investor's life and actions have been closely monitored by droves of Buffett fans who hang onto his words documented across numerous articles, videos, books, and other mediums.

Abiding by his rulebook has been instrumental in Buffett's ability to create his massive fortune. However, as we have seen just this year, Buffett himself doesn't always stick to the points he, himself, has laid out.

At the start of 2010, Buffett vigorously expressed his disapproval of the use of share spits and excessive use of company equity to fund M&A activity. When food giant Kraft (KFT) was pushing to purchase U.K. candy maker Cadbury, the Oracle called the share-fueled plan, "dumb." The investor reasoned that, by issuing new shares the company injects excessive supply into the market and dilutes shareholder power.

Despite his reservations, in order for the Oracle to fund his $34 billion bid for the remaining shares of Burlington Northern Santa Fe Railroad a handful of months later, he laid out a plan which included a significant share split of Berkshire Hathaway Class B (BRK.B) shares.

While these deviations, like the Kraft/Burlington Northern episode, are often more peculiar than detrimental, as we saw late last week, breaking a Buffett rule can be costly, even for Buffett.

Perhaps the most criticized example of Buffett breaking his own rules is his stance on derivatives. In a now famous letter to his shareholders, the Berkshire Hathaway (BRK.A) chairman took aim at derivatives, labeling them, "financial weapons of mass destruction." Given this harsh stance, one would think that Buffett and his company have made efforts to steer clear of these complex and risky products.

This assumption, however, would be false. In reality, his firm manages a massive derivative portfolio valued at over $60 billion.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs