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What Buffett Got Wrong


Even the Oracle of Omaha makes mistakes.

Discussing the US economy on CNBC this morning, Warren Buffett said, "We got past Pearl Harbor. We will win the war."

Buffett himself will likely win the war -- as he pointed out in his recently released annual letter to Berkshire Hathaway (BRK.A) shareholders, Berkshire's book value "has grown from $19 to $84,487, a rate of 20.3% compounded annually" over the past 45 years, since the present management has been in place.

Make no mistake -- Buffett is right more often than he is wrong. However, he has lost a few battles along the way.

Money manager Vitaliy Katsenelson says, "Though Buffett deserves admiration -- he is brilliant and likable and he has achieved incredible returns for his investors over the last half-century -- but he should not be canonized, and not everything he does or says is the ultimate truth."

Indeed, this latest letter reveals a costly Buffett bet gone bad at the insurance company Geico.

"Last year your chairman closed the book on a very expensive business fiasco entirely of his own making," Buffett wrote. "For many years I had struggled to think of side products that we could offer our millions of loyal Geico customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card."

Buffett said his idea was not well-received by his lieutenants, but he pushed it through anyway in 2005.

"I reasoned that Geico policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business," he continued. "We got business all right -- but of the wrong type."

Geico's pre-tax losses from credit-card operations came to $6.3 million. Berkshire sold $98 million of receivables for $0.55 on the dollar, losing $44 million.

Other credit-card concerns fared better, with Visa (V) posting a 2009 gross profit of $4.5 billion and Mastercard (MA) reporting gross profits of $5 billion.

NetJets, which Berkshire bought in 1998, was not exactly a roaring success for the company, either.

"In the 11 years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million," Buffett revealed. "Moreover, the company's debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire's guarantee of this debt, NetJets would have been out of business. It's clear that I failed you in letting NetJets descend into this condition."

In Berkshire's 2008 letter to investors, Buffett flagellated himself for doing "some dumb things in investments," like his purchase of ConocoPhillips (COP) shares when oil and gas prices were bumping up against their all-time high.

"I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," he noted. "Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."

Money manager Katsenelson doesn't believe Buffett's $30 billion-plus acquisition of Burlington Northern Santa Fe Corp. (BNI) will fare much better.

He calls it a "very cyclical, capital-intensive, not terrifically high-return-on-capital business" and doesn't think paying 18 times earnings (over the last 15 years its average P/E was 15) was a good idea.

"To make it even worse, part of the deal [was] financed by issuing what Buffett recently called "cheap" Berkshire stock," Katsenelson said. "There is little value to be unlocked in this business, and Buffett will practice his usual hands-off approach."

We'll see how the Burlington Northern deal works out; time will be the ultimate arbiter. But, an intensive investigation (okay, it was a 10-second search on YouTube) turned up video footage of Warren Buffett getting his head handed to him by an 11-year-old:

Whether or not one bets on Warren Buffett's investing acumen is a decision entirely up to the individual. Just don't ever bet on him to win at ping pong.

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