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Buffett Breaks His Rules Again

Warren Buffett's apprehension toward derivative reform is interesting considering his past view of this slice of the market.
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NEW YORK (TheStreet) -- Given his impressive knack for making money, it is no wonder that the ears of investors around the globe perk up when Warren Buffett opens his mouth -- but what Buffett says does not always coincide with what he does.

Over the past several months, Buffett has on a number of occasions diverged from his teachings in order to do what he feels is best for his company.

At the end of 2009, Buffett expressed his disapproval for

Kraft Food



stock-heavy bid for Cadbury. In the past, the investor had opposed

deals that were funded using an excessive amount of company shares. His concerns stem from his belief that an influx of new stock dilutes the voting power of existing shareholders. Also, the injection of extra supply of stock puts pressure on share price, driving it lower.

This lesson was pushed by the wayside, however, when Buffett decided to buy the remaining stake of

Burlington Northern Santa Fe Railroad for $34 billion. Buffett not only used company stock to fund the largest deal in

Berkshire Hathaway


(BRK.A) - Get Berkshire Hathaway Inc. Class A Report

history, but at the start of 2010, he also received shareholder approval for a

50-for-1 split on Berkshire Hathaway B Class Shares (BRK.B).

More recently, the ongoing debate over financial reform has highlighted another situation where Buffett blatantly diverges from his own rulebook.

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Right now, Warren Buffett is opposed to Washington's proposed plan to reform the U.S. financial system. One particular area of concern for the Nebraska native is Congress' bold plan to regulate the derivative industry. As the proposed bill currently stands, companies will have to offer up collateral for derivative contracts to protect against potential losses.

Fearing the detrimental effects caused by Congress' actions, Buffett has strongly urged Congress to include a provision to the bill that would exempt current derivatives from the proposed changes.

Buffett's apprehension toward derivative reform is interesting considering his past view of this particular slice of the market. In Berkshire Hathaway's 2002 annual report, the Oracle of Omaha used strong words when describing derivatives, calling them "time bombs" and "financial weapons of mass destruction."

After using this type of harsh rhetoric to describe derivatives, one would think it was safe to assume that Buffett steers clear of these instruments entirely. However, this assumption would be incorrect. While many think Berkshire Hathaway's success stems solely from its successful investment portfolio which includes household names like


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Wells Fargo

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Procter & Gamble

(PG) - Get Procter & Gamble Company Report

, Buffett's firm has also expanded its purse by managing a massive derivative portfolio valued at $63 billion, some of which are used by MidAmerican Energy to hedge energy prices.

Given Buffett's sizable exposure to these "weapons of mass destruction," it is no surprise that Buffett is at odds with Washington over the proposed plan to regulate the way they are traded.

Warren Buffett's number one rule is "don't lose money." As shown over the past few months, sticking to this rule has sometimes required the financier to bend or break others. This should not dissuade individuals from turning to him for general investing wisdom, since by following Buffett's advice, investors can construct a portfolio that provides returns that are stable over the long term. But when it comes to government policy, it raises the question of whether his words or his actions are the most important to follow.

This weekend, Buffett will be in Omaha for the annual Berkshire Hathaway shareholder meeting. What do you feel is the most important topic the financier should cover at this convention?

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.