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
the potholes in
investment portfolio and the
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
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!).
, 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
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
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).
In other words, while Warren Buffett has doubled his money in American Express over a 15-year period, the 4.7% compounded return (before dividends) is just so-so.
of American Express.
And if our numbers are right, Buffett just had his worst year since he started managing other people's money back in 1956. Furthermore, it all pretty much happened in just three months. Now, a good chunk of the "loss" comes from a derivatives book that Buffett is not selling any time soon. Assuming the world doesn't come to an end, those near-term losses should reverse in future periods. Furthermore, Buffett is famous for, among many other things, regarding a short-term drop in the value of an investment as a blip on the long-term scale. Once he's made up his mind about the value of an investment, he doesn't allow the market's manic-depressive moods to affect his own perception of that investment's value -- an almost unique trait in a market of manic-depressive investors who see signals in every uptick and downtick on the screen.Now, nobody's crying for Warren Buffett. His investors are as loyal as those Jonestown Kool-Aid drinkers -- and for good reason. His track record has no match. And unlike Bernard Madoff, he's as open about his methods as Paris Hilton about her sex life.-- Jeff Matthews, Ram Partners (Jeff Matthews Is Not Making This Up)
Warren Buffett has been blessed with unique and remarkable investment skills. His record of value creation is unprecedented. He is among the wealthiest people in the world. He has also been blessed with a patient (and very rich) investor base, most of whom are willing to accept his losses over the last six months as a speed bump.
Nevertheless, despite his past successes (and the vocal opponents to my view), I stand by my conclusion that Warren Buffett's salad days are over and that he has
And I also stand by my controversial conclusion (outlined yesterday) that, in the fullness of time, Berkshire's common shares might suffer the same fate of many other listed closed-end equity mutual funds; its shares could gradually trade at a discount to its investment value per share -- plus some multiple to pretax profits.
Berkshire's upcoming annual meeting will be interesting. I think I will go to Omaha and attend it.
Doug Kass writes daily for
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Know What You Own:
American Express operates in the financial credit services industry, and some of the other stocks in the field include
Discover Financial Services
. For more on the value of knowing what you own, visit TheStreet.com's
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.