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.
Recently, his heavy exposure to these products backfired. In the third quarter of 2010, Berkshire Hathaway saw profits decline by over 7%, with poor derivative bets alone leading to a $700 million quarterly loss. Interestingly, while derivatives proved detrimental to the firm, the traditional stock investments which Buffett is far better known for were seen as an element of strength in the Berkshire Hathaway report. An uptick in demand stemming from the ongoing economic recovery helped lift Burlington Northern. This helped to offset some of the losses resulting from his derivatives. As we have seen throughout this year, sometimes the investor himself has overlooked his own rules and it has weighed on his company's performance. Still, despite his stumbles, investors can still benefit from abiding by his investing advice and market commentary. The lion's share of Buffett's success and popularity as an investor has hinged on his ability to pick out and invest in undervalued, easy-to-understand companies that have long term upside potential. By largely sticking to these criteria he has been able to build a massive fortune which places him third on the list of the world's wealthiest individuals. Written by Don Dion in Williamstown, Mass.
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