For more than 50 years Warren Buffett has been an investing icon. However, critics are pointing to several events and decisions over the past few years that could potentially signal that the Oracle of Omaha's reign may be nearing its end. Let's look at a few of these events and see if they're actually cause for alarm. (Learn about Buffett's rise to the top in Warren Buffett: The Road To The Riches.)
- The Downgrade
Earlier this month, Buffett's firm, Berkshire Hathaway, was downgraded by Standard & Poor's, following its massive $26 billion investment in the Burlington Northern Santa Fe railroad. S&P cited that the firm's purchase was a factor in its loss of the coveted AAA rating – which it had held since 1989. Today it stands at AA+. Investors reacted by selling, and class A shares in the company fell overnight by $2,800 per share.
- The Rebuff
Typically, when Buffett speaks, investors listen. However, Buffett's recent criticism of Kraft's $19.3 billion takeover of Cadbury was rejected by debt investors who instead snapped up the company's bond offerings to finance the deal.
- Stepping into the Limelight ...
In the wake of the economic meltdown Buffett stepped in to fulfill the role of "comforter in chief" for an understandably distressed investment world. And while CNBC, MSNBC and other broadcast outlets reaped the ratings benefits, peers and critics questioned Buffett's out-of-character PR strategy. In the updated release of her book, "The Snowball: Warren Buffett and the Business of Life," author Alice Schroeder recounts that one of his friends counseled him with the phrase "Dignity, Warren, dignity." Ultimately, while viewers liked hearing from the investment titan it also led to a few flubs such as his uncharacteristic criticism of the President Obama's actions to stabilize the financial markets and his surprising admission that he did not anticipate that housing prices would stop climbing.
- … and yet, strangely silent.
At the height of the global credit crisis, Buffett strongly criticized the derivative instruments (i.e. credit default swaps) that helped trigger the massive economic meltdown and hammered the credit rating agencies as being complicit in the subprime mortgage meltdown. However, TV-watching investors may not have realized that according to Berkshire Hathaway's third-quarter 2008 10-K filing, the firm actually sold more than $2.5 billion worth of credit default swaps that year.
In addition, Buffett's firm actually held a 20% stake in Moody's Corporation, one of the three major bureaus that assigned top ratings to firms issuing the securities now well-known for being the silver bullet to the credit markets. While industry observers say that Buffett may be uncomfortable with his firm's investment in Moody's (according to a March 2009 New York Times article he has never personally attended a Board meeting), he was likely very comfortable with the ROI; within 72 months the value of his Moody's investment in Moody's skyrocketed from $499 million (in 2001) to $3.2 billion (in 2007). However, that profit quickly dissipated when Moody's was forced to downgrade 90% of CDO investments issued in 2006 and 2007. Despite the loss, critics contend that Buffett should use his position to press Moody's to make changes that he has personally called for within the ratings industry at large.
- Mistimed Investments
While hindsight can be any investor's worst enemy, it can be particularly difficult for Buffett given the scale of his purchases. One of his most recent costly losses involved his decision to inject massive amounts of cash into ConocoPhillips at the peak of gas and oil prices in 2008. He admitted in his annual shareholder letter that his mistiming "… has cost Berkshire several billion dollars." (Learn more in Buffett's Biggest Mistakes.)
- Selling Out?
In order to complete the purchase of Burlington Northern, Berkshire Hathaway financed the acquisition with both cash and a 50:1 split of the firm's class B stock. Suddenly the stock that has been priced beyond the reach of mere mortals for decades seemed to be not entirely out of the realm of possibility. The decision resulted in Berkshire Hathaway being added to the S&P 500. But this highly unusual move by Buffett concerned long-time followers and investors – is it a necessary one-time decision or a sign that the Oracle may be more willing to deviate from his normal course of action? While he admitted in a November 2009 PBS-TV interview with Charlie Rose that the stock split and investment "(was) not natural for me," he reiterated that the move was an important way of investing in an American business for the long-term. Nervous investors may wish that Buffett would stick more closely to the course that has long produced enviable results and contributed to his sterling reputation. (Learn more in Warren Buffett: How He Does It.)
- Finding It Harder to Find Value
If Buffett is known for one thing it's finding companies of value that produce stellar returns for investors. However, after a seemingly endless list of successes that skyrocketed his company's growth he confessed that it's becoming harder to find values. In the same November 2009 Charlie Rose interview Buffett said that he predicted reasonable returns for his investment in Burlington Northern admitting that "reasonable return is good enough." He continued, saying "you know, 50 years ago I was looking for spectacular returns, but I can't get 'em."
Historically, great leaders have always been criticized, and Warren Buffett is no exception. While his reputation may currently be taking a slight hit, the facts – and numbers – remain. Buffett is one of the most successful investors of all time and an overwhelming number of investors worldwide continue to follow him closely, heed his advice, and emulate his investing choices. Perhaps most impressive, at age 80 he shows no signs of giving up his seat at the table anytime soon. (For further reading, check out What Is Warren Buffett's Investing Style?)
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