Early Retirement Blog

Doubling Down on Disaster

Warren Buffet, America’s best known and wealthiest investor, is hoping you will help him out and buy his Bull.  With the stunning news that Berkshire Hathaway’s profits dropped 96 percent in the fourth quarter of 2008, he has sent out his customary letter to company shareholders, telling them they should continue to invest in his Bull.  “America’s best days lie ahead.”  Warren Buffett wrote.

If you don’t buy Warren Buffet’s Bull, if you stop believing and investing in America, then he will lose the 251 bets he placed in the stock market.   Warren Buffett a gambler?  Humble polyester Warren Buffett from Polyester Omaha Nebraska?

I came to admire Warren Buffett as an astute investor in the aftermath of the dot-com bubble bust.  He correctly realized that most of the dot-coms had business models that would never succeed.  He got a lot of flak for not joining the party, but unlike many other investors, he avoided a long and painful hangover.  He gained my respect.

Unfortunately, Warren Buffett got suckered into the housing bubble, investing billions in housing boom related stocks (carpets, bricks, jewellery, furniture).

Making high risk derivatives trades with his shareholders money,  Warren Buffett in an attempt to increase short-term profits, placed bets on the future values of companies and assets.  “If we lose money on our derivatives, it will be my fault,” Buffett said.  The AP reports “Buffett said he initiated all of Berkshire’s 251 different derivative contracts because he believes they were mis-priced in Berkshire’s favor.”

Wikipedia explains derivatives: “Speculators will want to be able to buy an asset in the future at a low price according to a derivative contract when the future market price is high, or to sell an asset in the future at a high price according to a derivative contract when the future market price is low.”

Andy Kilpatrick, author of the ironically titled book “Of Permanent Value: The Story of Warren Buffett,” tells the AP in the same article that “Berkshire’s results were still impressive given how they compare to the rest of the world.”  In 2008, Berkshire Hathaway lost only 10% of value,  compared to a 37% loss for the S&P 500.

Which may sound great, but what is missing from the article, is the fact that if the American people stop buying Warren Buffet’s Bull and stop investing in America, he and his investors are going to lose the Bull and have to eat shit.

Think about that, the next time you hear Warren Buffett tell you that, “there’s never been a better time to invest in America!”

Update: April 30, 2011
Well, well, well.  Today, 40,000 Buffett cult followers will converge in Omaha, Nebraska to hear “The Great One” explain his, and his presumed successor and top Berkshire Hathaway manager David Sukol’s actions in the front running scandal of Berkshire Hathaway’s Lubrizol acquisition.

More and more, as the PR curtain surrounding Warren Buffett slowly opens, it becomes apparent that Warren Buffett is in reality just another crony capitalist, and not the great investor the cult followers assumed.

Also Read:
How to Retire with Less Than $1 Million
When Will the Economy Hit Bottom?
How to Save $1 Million
What is a Double Dip Recession?