For several months now, even the most hard luck investors have had a decent run on Wall Street. Yet one accomplished moneyman is still waiting for good news: a rumpled 78-year-old Omaha resident named Warren Buffett.
He's the second-richest man in the world, so he's not getting any sympathy votes. Still, the past 10 months of Buffett's career have been jaw-droppingly bad—contributing to what he himself says was his worst year ever. He sailed into the crash with a portfolio full of financial stocks, just in time to see the global banking sector implode. Last October, five months before the market hit bottom, Buffett published a widely circulated editorial urging investors to "Buy American, I Am"—giving "Dewey Beats Truman" a challenger in the bad-timing sweepstakes. And when stocks finally rallied, the cheerleader got left off the team bus. Since his editorial hit the presses, the Standard & Poor's 500 stock index has returned nearly 2 percent—but Berkshire's stock is down about 24 percent.
Of course, one bad year doesn't negate a storied career. The last time Buffett trailed the market this badly was during the tech bubble—and he had the last laugh. Unlike a decade ago, however, Buffett was hurt this time by going with the grain, his portfolio sucked into the same downward spiral as everyone else's, his reputation scuffed by a foray into derivatives.
Investors have long seen Buffett as a safe harbor in rough seas. Today, some are asking the unthinkable: Has the Buffett Way lost its magic?
That magic has influenced the investing habits of millions of Americans, everyone from do-it-yourselfers who studied his strategies to mutual fund managers who believed that Buffett's way was the only way. Building on the teachings of his mentor, Ben Graham, Buffett has become the most famous practitioner of the "buy and hold" school of investing. His approach: Seek out companies with big "moats," or advantages over competitors; buy them cheap, ideally when other investors are pessimistic; plow their profits and dividends into other investments; and hold on as long as the businesses are valuable, no matter what the stock price does.
Those tactics worked like a charm for decades. But in the past year, investors lost confidence in the Buffett Way to an unprecedented degree. Berkshire's stock dropped 50 percent between December 2007 and the market bottom in March, wiping out $110 billion in wealth for its Class A shareholders. Although it rallied last week along with the overall market, it's still about 40 percent off its peak.
Losing Faith in the Buffett Way?
The sell-off was driven by harsh short-term numbers. Berkshire's nearly 80 subsidiary companies include dozens that were especially vulnerable to the downturn, including home builders, furniture makers and insurance companies. Its operating profits fell 62 percent in 2008 from the previous year, to $7.5 billion. And investors were just as leery of the $128 billion portfolio that Buffett manages under Berkshire's umbrella. Around 85 percent of that cache is concentrated in a small handful of stocks—many of which got clobbered in 2008. When the credit crisis started, Buffett held major stakes in American Express, Wells Fargo and U.S. Bancorp, all of which plummeted. He built a huge stake in ConocoPhillips, then watched oil prices nose-dive. And just as consumers began to see derivatives as a dirty word, the news emerged that Buffett had a $37 billion bet on future prices of the S&P 500 and other stock indexes.
Not all of Buffett's bets have gone bad, of course. He bought Goldman Sachs as it was sinking and was vindicated when it survived the crash and went on to post strong earnings. He snared preferred stock in General Electric that could pay him royally when the economy fully recovers. But last year's perceived slipups may still be driving investors away from Berkshire's stock. And Buffett himself raised his public profile just as he hit this exceptionally rough patch: He didn't just strike out; he struck out on national TV. Over the past two years, he has spent much more time in the public eye, with a ramped-up schedule of media appearances. Is it coincidence that Berkshire's performance stalled just as Buffett stepped out? "It's a false correlation," he insists, saying he needed to appear more often in public as Berkshire grew. (Buffett declined to be interviewed more broadly, saying he prefers speaking to TV anchors "because the reach is so much wider.")
The Buffett cognoscenti have learned some lessons from the annus horribilis. They now suspect Buffett's not as good an economist as he is an investor. As recently as his May 2008 shareholder meeting, when sidekick Charlie Munger predicted "turmoil as far ahead as we can see," Buffett shushed him, saying the real estate bubble wouldn't hurt the economy. Oops. "Buffett's a great, disciplined investor," says Bruce Greenwald, finance professor at Columbia University, "but he shouldn't make those calls." Others say Buffett's gospel of buy-and-hold is outmoded, now that markets have grown increasingly volatile. It's telling to compare his recent performance with those of hedge funds, which often dip quickly in and out of stocks. Over the past decade, the average North American stock-oriented hedge fund earned 9.7 percent a year after fees, compared with 2.9 percent for Berkshire, according to research by asset-management firm Lyster Watson & Co.
But most investors still believe in the Buffett Way. In their telling, it's the guru's timing, not his analysis, that went wrong—and to true Buffett acolytes, short-term timing is irrelevant. Buffett has said he underestimated the impact of banks' fuzzy math and called his ConocoPhillips buy "a mistake." As for his other decisions, if there's anyone with the patience to wait for them to pay off, it's the oracle in Omaha.
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