This blog post originally appeared on RealMoney Silver on Nov. 12 at 9:22 a.m. EST.
"I was wired at birth to allocate capital." -- Warren BuffettThe unprecedented market decline has hobbled some of the most successful investors and industrialists of our generation, proving Warren Buffett correct when he wrote, "Over time, markets will do extraordinary, even bizarre things. A single, big mistake could wipe out a long string of successes." Legg Mason's ( LM) Bill Miller, Citadel's Ken Griffin, Viacom's ( VIA) Sumner Redstone and Las Vegas Sands' ( LVS) Sheldon Adelson have suffered sharp reversals from their previous successes. No doubt many others will be revealed by year-end. The market decline is now even hurting Berkshire Hathaway ( BRK.A) as, arguably, Warren Buffett has lost his groove. As I have previously written, I have worshiped at the altar of Warren Buffett since the late 1970s -- ever since an investor and acquaintance, Conrad Taft, introduced me to his investment methodology and style at Berkshire Hathaway. In fact, my writings over the past seven years have often been punctuated with Buffett-isms. I have repeatedly objected to, scoffed at and refuted criticisms of Buffett's strategy on this site and elsewhere. Indeed, a month ago, in "Buy It Like Buffett," I highlighted Buffett's prescient market calls over the years and his recent call to " Buy American. I Am." During a portion of 2008, I was short Berkshire's stock. My rationale behind avoiding/shorting Berkshire Hathaway's common stock underscored that my negative investment view had to be differentiated from my respect (which borders on worship) of the greatest investment icon of the last half century. In preparation for this column, over the weekend I re-read my pal Jeff Matthews' great new book, Pilgrimage to Warren Buffett's Omaha: A Hedge Fund Manager's Dispatches From Inside the Berkshire Hathaway Annual Meeting. (Disclosure: I happily wrote the endorsement on the back of the book.)
"Even Napoleon had his Watergate." -- Yogi Berra
- Style drift. In the process of establishing a large derivative position on the S&P 500 by shorting puts, Buffett has deviated from his long-established investment discipline of avoiding "market plays" and of avoiding "financial weapons of mass destruction" (derivatives). This "play" has led to continued, multibillion-dollar losses over the past few quarters. According to the recently released 10Q, Berkshire has lost a total of $9 billion on Buffett's short put position.
"Without a total and complete discrediting of the Buffett gambit (which I divine to be that the short term, which encompasses anything from five days to five years, is irrelevant) and a revealing that the pain in his view is irrelevance to be borne -- despite the losses of which he is only a handful of people who can sustain them, as he is 'the house'." -- James Cramer, RealMoney
- Recent share acquisitions of Goldman Sachs (GS) and General Electric (GE) have been ill-timed. Buffett has convinced Corporate America (and Corporate Europe!) that he is a kind, avuncular sort, an easy and quick-to-deal-with investor of last resort. Toward that end, Buffett recently came to the rescue of General Electric and Goldman Sachs, investing $8 billion in both issues combined. While both investments were made on favorable terms -- they are both seriously underwater -- not too long ago Buffett purchased $5 billion of 10% preferreds in Goldman Sachs, with five-year warrants struck at $115 per share. At the time, Goldman was trading at $125; it now trades at $74 per share. Buffett also picked up $3 billion in 10% perpetual preferreds in General Electric, with warrants at $22.25 per share. At the time, GE was trading at $22; it now trades at $17 per share.
"In the long run, we're all dead." -- John Maynard Keynes
- Buffett's notion of long term is now becoming a convenient shroud to poorly timed investments. A recent Forbes article outlined most of Berkshire's largest investments. Berkshire's list of longer-term holdings includes a great many successful positions based on relationship to cost, but the cost/market gap is rapidly closing. Importantly, over the last few years, the performance of many of these investments -- including Comcast (CMCSA), Coca-Cola (KO), Kraft (KFT) and U.S. Bancorp (USB) -- have underperformed the market dramatically. And some of the largest holdings -- such as American Express (AXP), CarMax (KMX), Conoco Phillips (COP), Gannett (GCI), Ingersoll-Rand (IR), Moody's (MCO), USG (USG), WellPoint (WLP) and Wells Fargo (WFC) -- have been unmitigated disasters in 2007-2008.
"What we have created is, to some extent, a cult." -- Charlie MungerSimilar to Warren Buffett, I too have a reverence for logic. And perhaps Charlie Munger is right (though in a different context) in the quote above. Berkshire Hathaway might now be more of a cult than a superior investment vehicle. Warren Buffett has lost his groove. The question is whether he will get it back any time soon. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com. Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.