Warren Buffett Is Not Infallible

Why bother writing this? I am a fan of Buffett's investing philosophy and long term returns. However, before anyone starts to deify him, its worth noting that Buffett is very human, fallible like the rest of us. To identify the "oops" by Buffett is not to shame him but to give clarity to him as a person. He is very normal and is open to make mistakes. Not a saintly investor as some might try to opine but a flawed one who is possibly the best investor for the past 50 years.



The Sokol Incident: Sokol basically bought a few million shares of Lubrizol Corp for himself, and shortly after recommended Buffett and Berkshire to buy the company. Berkshire did buy in the end. Initially Buffett insisted that Sokol did nothing wrong, although later a Berkshire committee said the opposite in "a scathing report". Now Buffet is done defending Sokol. During the meeting, he said he should have probed more deeply when Sokol first revealed in January that he owned Lubrizol stock. "I obviously made a big mistake by not saying, 'Well when did you buy it,'" said Buffett. He called the Sokol situation "inexplicable and inexcusable." Apart from openly stating that Sokol violated the rules, Buffet also said he regretted the lack of initial outrage over the matter.

Coca-Cola: Buffett was on the audit committee for Coca-Cola, and an investor, when the SEC found that the company had misled investors about its earnings through the 1990s. The buck stops with the audit committee.

Moody's Corp: This one really irked me no end. Buffett has plenty to say about the market's exuberence and ponied up many reasons for the global subprime crisis. But never did he admit anything wrong about the ratings agencies in general. Why? Because Buffett is a substantial shareholder of Moody's. We are not talking of hundreds of ratings companies here, the top 3, namely Moody's, S&P and Fitch are responsible for giving AAA to so many CDOs, which led many investors to blindly rely on the strength and integrity of those papers. The silence by Buffett on this was deafening. The CEO of Berkshire Hathaway has said very little about his 13% stake in the rating firm, which has come under heavy fire for its role in the financial crisis. You know the complaints by now: That Moody’s and rivals S&P and Fitch negligently inflated ratings on mortgage securities, as they grew ever keener to win business from Wall Street banks and other underwriters.

Deloitte & Touche Incident: Berkshire kept D&T as its outside auditors AFTER learning that Deloitte's vice chairman had been trading in and out of Berkshire shares while he was on Berkshire's audit committee. That caused D&T and Berkshire to violate SEC's auditor-independence rules.

Munger, Family & Sons: If we can criticise Singapore Inc for this kind of transgressions, Buffett and Berkshire committed the same mistakes. Berkshire's VIP investing partner and vice chairman is Charlie Munger. How the hell can Berkshire still send so much legal fees to Munger's old law firm of Munger, Tolles & Olson. Very weak transparency and corporate governance here.

Buffett's Mclean Incident: If you happen to lost bucket loads of money buying and selling Mclean or any of the Chinese footwear companies, don't worry, you are in good company. Buffett also reveals that he spent $244 million for shares of two Irish banks that "appeared cheap" to him. At the end of the year, they were written down to their market price of $27 million, for a loss of 89 percent, and they've continued to drop.

Do What I Say, Not Do What I Did: He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation.

Tax Them, Don't Tax Me: Buffett's views on taxation, especially those on estate taxes, have been pathetic. There is a sordid irony if not an artificiality or phoniness about urging the continuity of high estate taxes and concomitantly avoiding the situation through setting up trusts and foundations. Evidence of avoiding income taxes is evident throughout Berkshire's life, as the company and Buffett have always used the IRS Tax Code to their advantage. There is clearly nothing wrong with that but similarly, it is somewhat disingenuous to urge higher taxes after a career of avoiding them.

Posted in: Warren Buffett