Has Warren Buffett Lost His Mojo?
Warren Buffett seemed to take it on the chin last week.
In fact, he’s been hammered for a couple of months now.
First came the annual Berkshire Hathaway (NYSE: BRK-B) shareholders meeting, the annual Woodstock for Capitalists and Buffett love fest held each May, where the Oracle of Omaha was upstaged by Goldman Sachs (NYSE: GS). Berkshire lent Goldman $5 billion in 2008. The storied Wall Street firm, with which Buffett has had a long love affair, has come under scrutiny by the Securities and Exchange Commission (SEC) for its part in creating an ill-fated mortgage deal. Questions about it dominated the daylong shareholders meeting.
The latest indignity was his appearance before Congress last week — under subpoena, no less — where he was compelled to answer questions about his stake in Moody’s Investor Service (NYSE: MCO). The company, which Buffett said he asserted no control over (true) is under scrutiny for its role in favorably rating the subprime mortgages that imploded.
Some said Buffett, who said Moody’s did what everyone else did and missed the subprime dangers, as did he, came off as detached, uninformed and talking out of both sides of his mouth. This performance seemed to stand in stark distinction to an earlier appearance on the Hill. Then, in 1991, Buffett, as chairman of Salomon Brothers, a post he briefly held, defended it from an inquiry into a rogue trader’s handling of U.S. Treasuries. “Lose money for the firm, and I will be understanding,” Buffett forcefully and memorably said. “Lose a shred of reputation for the firm, and I will be ruthless.”
What has happened to Warren Buffett? Is it time to put him out to pasture?
Anyone who knows the story of Warren Buffett knows that when he digs in his heels, he defies short-term conventional wisdom and looks like a genius in the end.
Consider his lecture at Sun Valley, Idaho, in 1999. This annual gathering, orchestrated by Allen & Co., a boutique investment bank, brings together some of the best technology, media and communications minds in the world. In 1999, as the tech bubble was ballooning, audience members were flying high, and Buffett was a keynote speaker.
Buffett told them they were nuts. He said the “New Economy” idea was foolish. His implications, though rather more pleasantly phrased, indicated to many of those in attendance that their business models were short-sighted — and doomed.
Buffett lost a few friends and a lot of public standing. Everyone thought he was crazy for sitting out the tech bubble. He looked nuts: The market continued to soar, and the tech-heavy Nasdaq reached an apex of 5,048 in March 2000.
#-ad_banner-#Then it stopped. And fell like a stone. In fact, the market lost $5 trillion in market cap from 2000 to 2002. The Nasdaq lost -53.3% as Berkshire shares tacked on +29.7%.
Buffett was right, and ended up richer.
Or consider a Wall Street scandal that almost no one remembers, the fascinating story of Tino De Angelis. His Allied Crude Vegetable Oil Co. had a neat little scheme going. Ships would come into port loaded mostly with water with only a little oil on top, and inspectors would certify the load, which was then put into storage tanks. De Angelis used the phantom oil as collateral for loans. Occasionally, inspectors would come out for a look to certify that the collateral was in place. Tino would show them a tank and they’d fill out their forms, then he’d take them to lunch while he pumped the oil into another tank, which they would then certify as being full, too. He hoodwinked them for quite some time.
It was none other than American Express (NYSE: AXP). And its losses from the “salad oil” scandal caused the stock to lose half its value. A cagey investor from Omaha took notice and loaded up on AXP stock. He promptly said that the matter would be taken care of no matter what it cost so as not to harm the value of the storied American Express name. The year was 1963, the scandal was overshadowed by the Kennedy assassination, and the investor, of course, was none other than Buffett. His current 151 million-share stake in AmEx cost $1.3 billion but is now worth $6.1 billion, a gain of +370% as of Dec. 31, 2009. The dividend alone is $111.6 million a year.
Buffett was right, and ended up richer.
Now, what’s going to happen this time?
History repeats itself, but not exactly. It’s tough to make Buffett materially richer, but the odds are that the performance he gave Congress was exactly what he wanted to give, for his reasons. And this reasoning that has guided Buffett for the past 40 years has served him very well and made a lot of his investors phenomenally wealthy.
As it stands, Berkshire is a steal at current levels (around $74 a share in Friday trading), with room to run easily back to its 52-week high of $83.57 and beyond. That would represent a +18% gain that outpaces even the best performer on the Dow Jones Industrial Average [The Boeing Co. (NYSE: BA)].
Warren Buffett has not lost his mojo. He still has his touch. Just as he pays no attention to the short-term performance of his companies and focuses instead on their long-term domination, so too will he ignore the interim bleating in the blogosphere and maiming in the mainstream media.
The outcome, if history is any guide, will be the same.
Buffett will be right, and he’ll grow richer.
The lesson of this is that it’s important to see what the market fails to recognize. And while Warren Buffett made money over the long run by recognizing value, today’s investors can put themselves in a position to capture standout returns by focusing on growth. There are dozens of opportunities to locate companies that have an edge that the market has not yet discovered. When Wall Street finally stumbles upon these winners, they can surge overnight. These fast-track picks make Buffett’s long-term gain look puny by comparison. [More on Warren Buffett in the InvestingAnswers Feature: 50 Warren Buffett Quotes to Inspire Your Investing]
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